Everything You’ve Ever Wanted To Know About FOMC

Last week, I launched the first part of our enlightening three-part series on the federal funds rate, starting with an in-depth exploration of its essence and its pivotal role in our economy. This week, I’m thrilled to take you deeper into the inner workings of the Federal Open Market Committee (FOMC) and shed light on the factors it considers when setting rates.

So, what exactly is the FOMC, and how did it come into existence? The story begins after a series of bank runs in the early 20th century, leading to the establishment of the Federal Reserve in 1913 by Congress. This was done to quell the financial panic through a decentralized system comprising twelve independent districts to enhance the supervision of the banking system. However, this independence came with its drawbacks, notably a significant lack of accountability and decisiveness.

To address these concerns, the Federal Open Market Committee was established between 1933-1935, tasked with the monumental role of setting the country’s monetary policy. Composed of members from the Board of Governors and Federal Reserve Bank presidents, the FOMC is chaired by a nominee from the president—Jerome Powell has been at the helm since 2018. The committee meets eight times a year to deliberate on economic and financial conditions to formulate appropriate monetary policy. With a dual mandate focusing on stable prices and maximum employment, the committee meticulously examines economic data, discussing the economy’s current state and strategizing on fulfilling their mandate. In assessing the economy’s health, the FOMC relies on critical reports such as Gross Domestic Product (GDP), the Unemployment Rate, the Consumer Price Index (CPI), and the Personal Consumption Expenditures (PCE), among others.

These indicators offer insights into the nation’s overall economic health, inflation trends, consumer behavior, and housing market dynamics, guiding the committee in their decision-making process. One of the FOMC’s primary tools is the federal funds rate, which has been crucial in managing inflation, especially as it began to surge through 2021 into 2022. The committee’s decisive actions to raise interest rates aimed to temper the economy and realign with the Fed’s dual mandate, particularly towards stable prices. As we stand in a period of anticipation, progress towards achieving a stable price level with a target inflation rate of 2% is underway.

However, the FOMC has indicated the need for further evidence from the data points mentioned above that prices will remain stable before considering a reduction in the federal funds rate. The committee’s next meeting on March 20 will be a significant focal point, and I’ll be back to wrap up our series with a recap of the decisions made. Keep an eye out for the final installment!