Federal Open Market Committee (FOMC)

About eight times a year, the Federal Open Market Committee (FOMC), which is part of the Fed, gets together in a not-so-top secret meeting and sets the federal fund rates, which is what banks charge each other when loaning money. These rates determine how expensive or how inexpensive money will be, at least until the next meeting, and they are based on the money market, which is the buying and selling of money between financial institutions. The FOMC looks at what is going on there, at the economy in general, probably a little at politics, and maybe at a Magic-8 Ball, then it decides what to do with interest rates and the economy overall.

If the FOMC tells the banks that interest rates are 5% instead of 10%, then money just got way cheaper. If things go the other way and rates go up to 15%, then money gets more expensive. So that's: FOMC. Say it with us. Fomc. The noise a meatball makes when it hits the floor.

Federal
Open
Market
Committee

And part of its purpose in life is to manage financial outcomes through monetary policy. The Federal Reserve pulls the three levers of monetary policy. Discount rate...open market operations...and bank reserve requirements. The big three monetary policies used to try and control the economy.

The FOMC is responsible for the open market operations part of that equation. It tries to fight the twin evils of unemployment and inflation. If unemployment is high, the FOMC will seek to increase the supply of money by holding back on sales of government paper: T-bills, bonds, notes, all that good stuff...leaving more cash sloshing around in the marketplace, and hopefully encouraging the cost of renting money, or interest rates, to decline.

When people can borrow more cheaply, they are more incentivized to spend. It works in the opposite direction as well. With the FOMC fearing inflation, they will issue lots of government paper, sucking out the excess cash in the marketplace, and likely causing interest rates to rise. The key issue remains that the FOMC is making money more expensive.

The FOMC holds eight secret, very Dan Brown-like meetings a year...to look through reams of data and decide what policy should be. Note that they are applying monetary policy here to do their bidding, not fiscal policy. The gist is that the Committee is the one sitting atop monetary policy in the U.S., and it’s the Committee that makes the decisions on the Big Three dials they can turn.

They can sift through data on the economy (jobs, inflation, bank fear surveys, etc.) and then make decisions about what to do. Or, uh…what not to do.