Federal Open Market Committee (FOMC)
Categories: Banking, Regulations, Econ
About eight times a year, the Federal Open Market Committee (FOMC), which is part of the Fed, gets together in a not-so-top secret meeting and sets the federal fund rates, which is what banks charge each other when loaning money. These rates determine how expensive or how inexpensive money will be, at least until the next meeting, and they are based on the money market, which is the buying and selling of money between financial institutions. The FOMC looks at what is going on there, at the economy in general, probably a little at politics, and maybe at a Magic-8 Ball, then it decides what to do with interest rates and the economy overall.
If the FOMC tells the banks that interest rates are 5% instead of 10%, then money just got way cheaper. If things go the other way and rates go up to 15%, then money gets more expensive. So that's: FOMC. Say it with us. Fomc. The noise a meatball makes when it hits the floor.
Federal
Open
Market
Committee
And part of its purpose in life is to manage financial outcomes through monetary policy. The Federal Reserve pulls the three levers of monetary policy. Discount rate...open market operations...and bank reserve requirements. The big three monetary policies used to try and control the economy.
The FOMC is responsible for the open market operations part of that equation. It tries to fight the twin evils of unemployment and inflation. If unemployment is high, the FOMC will seek to increase the supply of money by holding back on sales of government paper: T-bills, bonds, notes, all that good stuff...leaving more cash sloshing around in the marketplace, and hopefully encouraging the cost of renting money, or interest rates, to decline.
When people can borrow more cheaply, they are more incentivized to spend. It works in the opposite direction as well. With the FOMC fearing inflation, they will issue lots of government paper, sucking out the excess cash in the marketplace, and likely causing interest rates to rise. The key issue remains that the FOMC is making money more expensive.
The FOMC holds eight secret, very Dan Brown-like meetings a year...to look through reams of data and decide what policy should be. Note that they are applying monetary policy here to do their bidding, not fiscal policy. The gist is that the Committee is the one sitting atop monetary policy in the U.S., and it’s the Committee that makes the decisions on the Big Three dials they can turn.
They can sift through data on the economy (jobs, inflation, bank fear surveys, etc.) and then make decisions about what to do. Or, uh…what not to do.
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finance a la shmoop what is the Federal Open Market Committee... FOMC! come say it
with me FOMC yeah that's the noise of meatball makes when it hits the floor it [Meatball lands on the floor]
also happens to be the acronym for the Federal Open Market Committee and part
of its purpose in life is to manage financial outcomes through monetary
policy all right well the Federal Reserve pulls three levers of monetary [3 Levers appear]
policy discount rates open market operations and bank reserve requirements
those are the big three the big three monetary policies used to try and [Monetary policies appear]
control the economy well the font is responsible for the open market
operations part of that equation it tries to fight the twin evils of [Person pulls open market lever]
unemployment and inflation and among other things if unemployment is high
well in general the FOMC will seek to increase the supply of money by holding
back on sales of government paper like t-bills bonds notes and all that good
stuff leaving more cash sloshing around in the [Dollar bills appear]
marketplace and hopefully encouraging the cost of renting money or interest
rates to decline like encouraging people to borrow because rates are cheap well
when people can borrow more cheaply yes they're incentivized to spend more at [Person picks up stack of cash]
the mall on earrings and rings for other places well it works in the opposite
direction as well with the FOMC fearing inflation while they'll issue
lots of government paper sucking out the excess cash that was previously in the [Money supply meter declines]
marketplace and likely causing interest rates to rise right so cash will be less
available and people want more to rent their precious dollars as interest got
it okay well the key issue remains that the FOMC is making money more expensive
when it does that when an issues paper sucking cash out of the system it's hard
concept for most people including me to understand here
well the FOMC called eight secret very dan Brown like meetings a year to look [Months of year appear on calendar]
through reams of data and decide what policy should be note that they're
applying monetary policy here to do their bidding not fiscal policy the gist
is that the committee is the one sitting atop monetary policy in the US and it's
the committee who makes the decisions on the big three dials they can turn one [Committee standing by 3 dials]
two and three they can sift through data on the economy jobs inflation bang
fear surveys etc and then make decisions about what to do or you know what not to
do I remember that Soup Nazi from Seinfeld no bonds for you [Nazi holding a bond]