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Policy Effects
D e p o s ito ry in s titu tio n s are re q u ire d to m a in ta in reserves in
certain p ro p o rtio n s against variou s typ e s o f th e ir deposits.
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in th e ba nking system . Federal Reserve purchases o f securities
If reserves increase, d e p o s ito ry in s titu tio n s w ill generally
acquire new loans and in vestm en ts w h ic h w ill tend to exert
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add to reserves; sales w ith d ra w reserves fro m the system.
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Open m a rk e t o p e ra tio n s d ire c tly a ffe c t the level o f reserves
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The Federal
Open Market
Committee
A SERIES ON THE STRUCTURE OF THE FEDERAL RESERVE SYSTEM
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d o w n w a rd pressure on in te rest rates.
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T he in te rest rate th a t is m ost d ire c tly affected by open m arke t
o p e ra tio n s is the federal fu n d s ra te —th e rate at w h ich de
p o s ito ry in s titu tio n s lend reserves to one an o th e r, usually on
an o v e rn ig h t basis. T h a t rate is d e te rm in e d by sup ply and
dem and fa c to rs : if reserves are p le n tifu l and fe w in s titu tio n s
need to b o rro w reserves, th e federal fu n d s rate is lik e ly to be
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lo w ; if reserves are scarce and m any in s titu tio n s are b id d in g
fo r a lim ite d q u a n tity o f available reserves, th e rate is lik e ly
to be d rive n up.
Open m a rke t o p e ra tio n s as d ire cte d b y th e FO M C are thu s one
o f th e to o ls used by th e ce n tra l ba nk to in flu e n ce th e to ta l
a m o u n t o f m oney and c re d it available in th e eco n o m y. The
Federal Reserve a tte m p ts to p ro vid e enough reserves to en
courage m od era te g ro w th in m on ey and c re d it in keeping
w ith th e lo ng er-run needs o f an exp an din g e co no m y.
Reports
By law , th e Board o f G ove rn ors is req uire d to keep a com p le te
record o f the actions ta ke n b y th e F O M C on all questions o f
p o lic y and to in clu d e in its annual re p o rt to Congress th e vote
on and the reasons fo r each a c tio n . In o rd e r to pro vid e th is
in fo rm a tio n on a tim e ly basis, a "R e c o rd o f P o licy A c tio n s " is
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prepared a fte r each m ee ting and is released to th e press and
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th e p u b lic a fe w days a fte r th e n e x t re g u la rly scheduled FOM C
m eeting. A n o th e r re p o rt, "M in u te s o f A c tio n s ,” lists p o lic y
and n o n -p o lic y actio ns and is made available fo r p u b lic inspec
tio n at th e same tim e th e R ecord o f P o licy A c tio n s fo r the
co rre spo nding m eeting is released.
T w ice a year, as re q u ire d in th e F u ll E m p lo y m e n t and B al
anced G ro w th ("H u m p h re y -H a w k in s ") A c t o f 1978, the Board
subm its a w ritte n re p o rt to Congress on th e state o f th e
eco n o m y and th e course o f m o n e ta ry p o lic y , and it m ay be
called to co n su lt w ith Congress on th is re p o rt.
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er.
The Federal Open M a rk e t C o m m itte e (F O M C ) is the
most im p o rtan t m o n eta ry p olicy-m akin g body o f the
Federal Reserve System . It is responsible fo r the
fo rm u latio n o f a po licy designed to p ro m o te econo
mic g ro w th , fu ll e m p lo y m e n t, stable prices, and a
balance in in tern ational trade and paym ents. The
F O M C makes key decisions regarding the conduct
o f open m arket op eratio ns—purchases and sales o f
U .S. G overnm ent and o th e r securities—w hich affec t
the provision o f reserves to depo sito ry institutions
and, in tu rn , the cost and a va ila b ility o f m oney and
credit in the U .S. eco n om y. T h e F O M C also directs
System operations in foreign currencies.
Membership of the Committee
The FO M C is com posed o f th e seven m em bers o f th e Board o f
G overnors and five Reserve Bank Presidents. T he P resident o f
th e Federal Reserve Bank o f N ew Y o rk serves on a c o n tin u o u s
basis; th e Presidents o f th e o th e r Reserve Banks serve on a
Organization
By s ta tu te , th e C o m m itte e d e te rm in e s its o w n o rg a n iz a tio n .
reports fro m System s ta ff on past and p ro spe ctive e co n o m ic
C o m m itte e elects its C h airm a n and V ice C h airm a n and selects
and fin a n cia l de ve lo p m e n ts are sent to each C o m m itte e m e m
s ta ff o ffic e rs to serve th e C o m m itte e fo r th e com ing year.
ber and to n o n m e m b e r Reserve Bank Presidents. R eports
T r a d itio n a lly , th e C hairm a n o f th e B oard o f G overnors is
prepared by th e M anagem ent o f th e System O pen M a rke t
elected as C hairm an and th e P resident o f th e Federal Reserve
A c c o u n t on o p e ra tio n s in th e d o m e stic open m a rk e t and in
B ank o f N ew Y o rk as V ice C h a irm a n . S ta ff o ffic e rs are select
fo re ig n currencies since th e last regular m eeting are also
ed fro m am ong th e o ffic e rs and em ployees o f th e B oard o f
d is trib u te d . A t th e m eeting its e lf, oral re p o rts are given by
G ove rn ors and th e Federal Reserve Banks. O ffic e rs in c lu d e :
sta ff o ffic e rs on th e c u rre n t and p ro spe ctive business s itu a tio n ,
a S ecretary to m a in ta in a record o f a ctio n s take n by th e
on c o n d itio n s in fin a n c ia l m arke ts and on in te rn a tio n a l fin a n
C o m m itte e u p o n all qu estio ns o f p o lic y ; eco no m ists to prepare
cial developm ents. F o r exa m p le , th e C o m m itte e considers
and present to th e C o m m itte e in fo rm a tio n regarding business
such fa cto rs as: in fla tio n , la b o r m a rke t d e velopm e nts, e m p lo y
and c re d it c o n d itio n s and d o m e s tic and in te rn a tio n a l eco
m en t and u n e m p lo y m e n t, p ro d u c tio n , re ta il sales, consum er
n o m ic and fin a n c ia l d e ve lo p m e n ts; G eneral Counsel to fu rn is h
spending, wages and in com e , re side ntial c o n s tru c tio n , housing
legal advice; and tw o Managers o f th e S ystem Open M a rke t
starts, e x p o rts and im p o rts , business in ve stm e n t, in ve n to rie s,
A c c o u n t—one fo r d o m e s tic and one fo r fo re ig n o p e ra tio n s —
business p ro fits , in te re st rates, fiscal p o lic y , and oth ers. O ral
t o execute and to re p o rt to th e C o m m itte e on open m a rke t
rep orts on tra n sa ctio n s in th e System O pen M a rk e t A c c o u n t
tra n sa ctio n s.
P hila delph ia, and R ic h m o n d ; 2) Cleveland and C hicago;
3) A tla n ta , St. Lo uis, and D 31las; and 4) M in n e a p o lis, Kansas
C ity , and San Francisco.
Revised June 1981
since th e previous m eeting are given by th e Managers o f th e
acco un t.
Meetings
ber is elected to th e C o m m itte e by th e Boards o f D ire c to rs o f
each o f the fo llo w in g groups o f Reserve Banks: 1) B osto n,
P rio r to each regular m ee ting o f th e C o m m itte e , w r itte n
A t its fir s t m ee ting on o r a fte r M arch 1st o f each year, th e
ro ta tin g basis fo r one-year term s be ginning on M arch 1st o f
each year. R o ta tio n is co n d u cte d so th a t each year one m e m
The Decision-Making Process
F o llo w in g these re p o rts, th e C o m m itte e m em bers and o th e r
T he law requires th a t m eetings o f th e F O M C be held at least
Reserve Bank Presidents discuss p o lic y . T y p ic a lly , each p a r
fo u r tim e s each year in W ash in g to n , D .C . u p o n th e call o f the
tic ip a n t expresses his o r her o w n views on th e state o f the
C h airm a n o f th e Board o f G ove rn ors o r at the request o f any
eco no m y and prospects fo r th e fu tu re , and on th e a p p ro p ria te
th re e m em bers o f th e C o m m itte e . T y p ic a lly , m eetings are
d ire c tio n fo r m o n e ta ry p o lic y . T hen each makes a m ore
held once every 5 to 8 weeks in th e o ffic e s o f th e Board o f
e x p lic it re co m m e n d a tio n fo r p o lic y fo r th e co m ing in te r
G ove rn ors in W ashing to n, a cco rd in g to a schedule te n ta tiv e ly
m eeting p e rio d (and f o r th e longer ru n , if under co n s id e ra tio n ).
agreed up o n at th e beginning o f th e year. If circum stances
F in a lly , th e C o m m itte e develops a consensus regarding the
re q u ire c o n s u lta tio n o r co n s id e ra tio n o f an a c tio n betw een
ap p ro p ria te course fo r p o lic y w h ic h is in c o rp o ra te d in a d ire c
these regular m eetings, m em bers m ay be called on to p a rtic i
tive to the Federal Reserve B ank o f New Y o r k —th e Bank
pate in a special m eeting or a te le p h o n e con feren ce, o r to vote
selected b y th e C o m m itte e to execute tra n sa ctio n s fo r the
on a reco m m en ded a c tio n b y telegram o r te le p h o n e . A t each
System O pen M a rk e t A c c o u n t. T he d ire c tiv e issued by th e
regular m ee ting , th e C o m m itte e votes on th e p o lic y to be
FO M C is cast in re la tiv e ly sp e cific term s so as to p ro vid e
carried o u t d u rin g th e in te rva l betw een m eetings; at least tw ice
concrete guidance to th e Manager in th e c o n d u c t o f d a y-to -
a year th e C o m m itte e also votes on c e rta in lo ng er-run p o lic y
day open m a rk e t o p e ra tio n s. In its present fo rm , th e d ire c tiv e
o b je ctive s.
sets fo rth the C o m m itte e 's o b je ctive s fo r lo ng er-run g ro w th
A tte n d a n c e at m eetings is re s tric te d because o f th e c o n fid e n
o u t s h o rt-te rm o p e ra tin g guides fo r rates o f g ro w th in the
tia l n a tu re o f fin a n c ia l in fo rm a tio n discussed, and is lim ite d
aggregates and an associated range o f to le ra b le changes in
in certain key m o n e ta ry and c re d it aggregates. It also sets
to C o m m itte e m em bers, n o n m e m b e r Reserve Bank Presidents,
m oney m a rke t c o n d itio n s . P o lic y is co n d u cte d w ith emphasis
s ta ff o ffic e rs , th e Managers o f th e S ystem a cco u n t, and a small
on su p p lyin g reserves at a rate co n siste n t w ith these objectives.
nu m b e r o f B oard and Reserve Bank s ta ff.
@FedFRASER