FOMC definition

What is the meaning of FOMC?

FOMC stands for the Federal Open Market Committee, which is the branch of the Federal Reserve responsible for reviewing and overseeing open market operations in the US. Through intervening in open market operations – buying or selling government securities – the FOMC can indirectly change the federal funds rate.

What does the FOMC do?

The FOMC meets eight times throughout the year to coordinate the open market conditions in the US. In its role, the FOMC is mainly concerned with raising or lowering the federal funds rate, which determines the rate of interest on overnight loans between US banks.

To do this, the FOMC will buy government securities such as treasury bonds to increase the supply of money, which indirectly lowers the federal funds rate. The FOMC could also sell securities to reduce the supply of money which indirectly raises the federal funds rate.

Who sits on the FOMC?

All seven members of the Board of Governors sit on the FOMC, alongside a rotational selection of four of the 11 heads of the regional Federal Reserve banks in the US.

The president of the Federal Reserve Bank of New York also has a place on the FOMC, and is a member of the Board of Governors as a de facto first among equals in the regional Federal Reserve banking system. This brings the total membership of the FOMC up to 12.

Role of the FOMC vs the Federal Reserve

Since the FOMC is a branch of the Federal Reserve, the roles of the two entities in ensuring the overall stability of the US financial system overlap. However, the most important difference to remember is that the Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, while the FOMC is responsible for open market operations.