What Is the FOMC, and What Does the Fed Do?

In this post, we'll look at what the FOMC is and what the Fed does. To sum up the key point first: the FOMC is a body under the Fed that decides US monetary policy.

What Is the FOMC?

FOMC stands for the Federal Open Market Committee. It serves as the market body that sets the direction of US monetary policy. The FOMC has 12 members in total. Seven are Fed governors (members of the FRB) appointed by the US President and confirmed by the Senate, and the other five are presidents of Federal Reserve Banks.

Why the FOMC Matters

The FOMC is quite important to investors and traders. That's because the FOMC sets the direction of the US macroeconomy, and because big volatility tends to occur before and after FOMC meetings.

Through the FOMC, the Fed decides how to respond to a range of economic conditions, including short- and long-term interest rates, exchange rates, employment, and inflation. The reason all asset prices soared during COVID was that the Fed rolled out unlimited easing, and the asset price decline that followed was due to the Fed's tightening policy. (Of course, strictly speaking, it isn't 100% down to that, but there's no denying that the Fed's monetary policy had an enormous impact.)

In short, the FOMC matters because short- and long-term asset price movements in the market are heavily swayed by the Fed's FOMC decisions.

The FOMC Committee and Its Chair

FOMC members are usually made up of hawks, who favor tight monetary policy, and doves, who are on the opposite side. Among them, the Board chair has an especially strong voice, so their influence on the market is enormous. The current FOMC chair is Jerome Powell, who began his first term in 2018 and started his second term in May 2022.

The Role of the Fed, Which Runs the FOMC

The FOMC is run by the Fed. So what role does it play? First, let's take a quick look at the Fed. The Federal Reserve Board, known as the Fed, is the central banking system of the United States and is responsible for leading US monetary policy. "The Fed" is short for the Federal Reserve System. It was founded in 1913 and is made up of the Federal Reserve Board, 12 Federal Reserve Banks, the FOMC, and 2,800 member banks.

So what is the Fed's core role? Controlling the money supply! The Fed buys and sells government bonds in the financial markets. It also sets the benchmark interest rate and determines reserve requirements. Through these, it works to keep inflation and prices at target levels and to maximize employment. In other words, it works to stabilize the economy of the United States. To make these decisions, they need to hold meetings, right? That's exactly what the FOMC is.

FOMC Meeting Details

Regular FOMC meetings are held 8 times a year (January, March, April, June, July, September, October, and December). However, additional meetings may be held as needed. The meetings are held behind closed doors, and during that period Wall Street and analysts try all sorts of ways to guess the direction of the Fed's monetary policy.

The FOMC minutes are released three weeks after the policy decision. The minutes include a wide range of data that can affect the market.

The press conference that follows the release of the minutes is also worth watching. The press conference often hints at the FOMC's future direction. As a result, stock and cryptocurrency prices tend to react sensitively to that day's press releases and speeches by Fed officials.

Final Summary

The FOMC is the body that hosts the meetings the Fed holds 8 times a year, and its role is to set the direction of US monetary policy. The FOMC committee is made up of 7 Fed governors and 5 Federal Reserve Bank presidents. Except for the president of the Federal Reserve Bank of New York, the presidents of the other banks rotate every year.

The Fed's core role is to use the FOMC to manage inflation, keep prices at target levels, and work to maximize employment. US interest rates and the direction of the macroeconomy are decided through FOMC meetings. That's why asset prices in the market, such as stocks and cryptocurrencies, tend to react sensitively and show large volatility during FOMC periods.