The group that makes monetary policy for the Federal Reserve System is the Federal Open Market Committee (FOMC). In addition to formulating monetary policy, the FOMC decides whether the Federal Reserve will join the Treasury Department in foreign exchange (FX) market intervention. Intervention has become much less frequent in recent years; U.S. monetary authorities intervened in the FX market eight times in 1995, but only twice in the following seven years.
By law, the FOMC must meet at least four times a year; in recent years, it has met eight times a year. The meetings, held in Washington, D.C., are attended by the members of the Fed's Board of Governors (Board of Governors), the presidents of the 12 Federal Reserve Banks, and some senior Federal Reserve staff members. Most FOMC meetings are concluded in a single day, but the two meetings each year that precede the Fed's semi-annual reports to Congress on monetary policy last two days each. In 2008, the meetings are scheduled for January 29-30, March 18, April 29-30, June 24-25, August 5, September 16, October 28-29 and December 16.
There are 12 voting members of the FOMC: the seven members of Board of Governors and the presidents of five of the 12 Federal Reserve Banks. The president of the Federal Reserve Bank of New York is a permanent voting member of the Committee, and the presidents of the other Reserve Banks serve one-year terms as voting members in a rotation that is set by law. Nine of the Reserve Bank presidents vote one year out of every three, while the presidents of the Federal Reserve Banks of Chicago and Cleveland vote in alternate years.
The Federal Reserve Bank presidents voting on the FOMC in 2008 are those from Cleveland, Dallas, Philadelphia, Minneapolis and New York, as a permanent voting member.
By tradition, the chairman of the Board of Governors serves as FOMC chairman and the president of the New York Fed as FOMC vice chairman. If a voting Federal Reserve Bank president misses an FOMC meeting, another Bank president votes in his/her place. However, if the president of the Federal Reserve Bank of New York is absent, the first vice president of the New York Fed votes instead.
The status accorded the New York Fed is in recognition of the unique role that the Bank plays in the Federal Reserve System. For example, all of the open market operations—the buying and selling of U.S. government securities in the secondary market to influence money and credit conditions in the economy—that the Federal Reserve conducts are carried out by the New York Fed. Also, when the U.S. monetary authorities, the Fed and the Treasury, decide to intervene in the foreign exchange market, it is the New York Fed that carries out the intervention.
The appointment procedures for both the members of the Board of Governors and Reserve Bank presidents are designed to minimize the influence of politics on the FOMC. Governors are appointed (by the president of the United States, with the approval of the U.S Senate) for 14-year terms—much longer than the terms of elected office holders. Moreover, the 14-year terms are staggered—one expires on January 31 in every even-numbered year—limiting the ability of a U.S. president to name a majority of the Board in a four-year presidential term. Each Reserve Bank president is appointed for a five-year term by his/her Bank's board of directors, with the approval of the Board of Governors. Six of the nine directors, in turn, are chosen, not by politicians, but by the banks that belong to the Federal Reserve System, and three are chosen by the Board.
At the meetings, a senior official of the Federal Reserve Bank of New York presents a discussion of developments in the financial and foreign exchange markets, along with the details of the market activities that the Fed has conducted since the previous FOMC meeting. Senior staff from the Board of Governors then present their economic and financial forecast after which the individual Governors and Reserve Bank presidents (including those not currently voting) present their views of the economic outlook.
When the presentations are concluded, the Board's director of monetary affairs discusses the relevant monetary policy options, without making a policy recommendation. Then, usually beginning with the chairman, the Board members and Reserve Bank presidents—again including those not voting—discuss their policy preferences. The committee then votes.
Currently, FOMC policy is formulated in terms of a target for the federal funds rate, the interest rate that banks charge one another for short-term loans. In the past, policy was formulated in terms of other indicators, such as the money supply. In 2000, when the Humphrey-Hawkins legislation requiring the Fed to set target ranges for money supply growth expired, the Fed announced that it was no longer setting such targets because money supply growth does not provide a useful benchmark for the conduct of monetary policy.
At the conclusion of each FOMC meeting, the Committee issues a directive instructing the Federal Reserve System's domestic open market desk at the New York Fed to carry out the policy decision through the use of open market operations. In addition, the FOMC announces its monetary policy decision and states whether economic conditions pose a greater risk to its goal of price stability or to its goal of sustainable growth or whether the risks are equal. The post-FOMC-meeting announcements also report on discount rate changes, which are less frequent than changes in the target for the federal funds rate.
The minutes of each FOMC meeting are published approximately six weeks later, a few days after the following meeting, and appear in the Board of Governors' monthly Federal Reserve Bulletin.
Occasionally, the FOMC makes a change in monetary policy between meetings, as it did after a telephone consultations in October 1998 and January, April and September 2001. The action on September 17, 2001, came in the wake of the September 11 terrorist attacks on the Pentagon and the World Trade Center.
While the Federal Reserve Bank presidents discuss their regional economies in their presentations at FOMC meetings, they tend to base their policy votes on national, rather than local, conditions. In recent years, FOMC decisions generally have been unanimous or nearly unanimous; there have not been more than two dissents on any FOMC monetary policy vote since 1992.