A Day in the Life of the FOMC:An insider's perspective on the inner workings of the Federal Reserve's monetary policymaking body
By Dr. Anthony Santomero, former president of the Federal Reserve Bank of Philadelphia
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Introduction
FOMC stands for Federal Open Market Committee — the committee charged with the monumental responsibility of making monetary policy at the Fed.
In terms of structure, the FOMC is composed of 12 Federal Reserve Bank presidents and the seven members of the Board of Governors. While all Fed presidents attend and contribute to the discussions, only five vote. This is done on a rotating schedule of one-year terms.
As one who has been a voting member of the FOMC, I would like to eliminate some of the mystery surrounding what goes on behind closed doors at the FOMC meetings and share with you an insider's perspective on the inner-workings of the Federal Reserve's monetary policymaking body. The following agenda is representative of a typical FOMC meeting. To put it simply, it is A Day in the Life of the FOMC.
Mechanics of the Meeting
The FOMC has eight scheduled meetings per year, usually on Tuesdays, at 9 a.m. Since each president typically brings one senior staff member to provide supporting documentation for the region's economic outlook, I am usually accompanied at these meetings by the Director of Research.
These scheduled meetings are usually sufficient to conduct FOMC business. However, when circumstances dictate, the FOMC can convene quickly to address a situation requiring immediate attention. This was the case following September 11 and at two other times in 2001.
For scheduled FOMC meetings, we follow a logical process that results in what I believe are prudent and well-informed decisions on the future course of monetary policy.
The first agenda item is a presentation by the Manager of the System Open Market Account at the New York Fed. His presentation covers developments in the domestic financial and foreign exchange markets and provides details of open market operations since the last FOMC meeting. It is the responsibility of the System Open Market Account Manager to interpret the market's activity and participants' response to incoming economic data.
Up next is the Director of Research and Statistics at the Board, who presents the Board staff's forecast for the U.S. economy. This forecast has already been circulated to FOMC members in a document known as the Greenbook, named for its green cover. The latest forecasts and statistical data are thoroughly reviewed and analyzed.
The meeting progresses to the first of two "go-rounds," the core of the FOMC meetings. In the first go-round, the members of the FOMC present their views on their local and national outlook. Bank presidents generally go first because we provide more detailed and real-time information based on local developments in and around our respective regions. Most of the regional economic data I present are compiled through primary research conducted by our talented team of economists here at the Philadelphia Fed.
The data included are, in fact, region specific, but we tend to spotlight different industries. For example, one would expect the review of regional conditions in the San Francisco District to lend insight into the tech sector; Chicago covers a region that is heavily dependent upon manufacturing and automobiles, and so on. Here in Philadelphia, our District has become much more diverse and representative of the entire national economy. Therefore, our local perspective tends to mirror what is happening over all of these sectors. As you know, our Business Outlook Survey is closely watched but so are our retail and credit markets.
As a regional Bank president, I constantly collect up-to-date intelligence on current and likely future conditions from the Bank's Board of Directors, advisory councils, informal "town meetings" around the Third District, as well as my everyday contacts. These insights sharpen the picture provided by the statistics. Accordingly, this portion of the meeting is useful for valuable "tone and feel" information about economic activity throughout the country.
In our brief presentations on the national economy, the FOMC members also seek to position themselves relative to the previously presented staff forecast, that is, stronger or weaker growth, higher or lower inflation, etc. Next we move to the most crucial stage of the meeting: the discussion of policy options and the policy vote.
At this point, the Director of Monetary Affairs, who also serves as the Secretary of the FOMC, takes the floor. The policy options he is about to lay out have already been circulated to the FOMC members in a document called the Bluebook, again reflecting the color of its cover. The earlier outlook discussions have laid the groundwork for the policy decision. So, now, the Director's presentation outlines policy options, which are couched as no change, or an increase or a decrease in the fed funds rate — and a clear rationale for each option.
In this case it is the Chairman who goes first. He lays out his view on the outlook and then offers his policy prescription. Each of the members follows in turn, laying out his other views and commenting on his other target for the fed funds rate.
This is where the next go-round takes place and where the diverse professional experience of FOMC members adds immense value to the meeting. With backgrounds ranging from banking, to finance, to economic forecasting, to academia, each Committee member brings his or her own perspective on the issues. Although our forecasts are based on sophisticated econometric modeling, it is the skilled judgment of each Committee member that helps us reach the best conclusion.
Once the second go-round has been completed, the Chairman summarizes his sense of the policy prescription. Now is the critical moment: the vote. But the Committee tries to converge on a consensus through the earlier deliberations. It is common for some differences of opinion to remain, yet a unanimous vote most often results.
When the voting members of the Committee are polled, the Chairman votes first, Vice Chair second, and the remaining members in alphabetical order. It is important to point out that this is the first and only time in the meeting that the Reserve Bank presidents are treated differently, depending on whether they are classified as currently voting members. Up to this point, they have all participated on equal terms in the discussions and have played an important role in the consensus building that leads to the formal policy vote. The president of the New York Fed is always a voting member; the other Bank presidents vote on a rotating basis of one-year terms.
Finally, the wording of the announcement, complete with the interest rate target, the so-called bias, and determining factors, is discussed. This portion of the meeting may be brief or not, depending upon the Committee's sensitivity to the communiqué's wording and market expectations.
A decision is reached and finally announced to the public at 2:15 p.m. that day. The formal minutes are released about five weeks after meetings, and the full transcripts are released after five years.
The official decision, called the policy directive, is essentially instructions to the Manager of the System Open Market Account at the New York Fed. He will conduct open market operations so as to achieve the intended funds rate. And so the course is set for monetary policy.
Now you know what goes on inside the FOMC. In an era when everyone, from economists, to market analysts, to the media, seems to anticipate the Fed's every move, the FOMC plays an integral role in determining the path of our economy.
At the end of the day, our goal is to maximize growth without compromising our commitment to the price stability that has fostered our economy's unwavering strength and resilience. This has always been our utmost objective.
Since the FOMC's beginnings, the U.S. economy and financial system have grown increasingly complex — especially in light of recent uncertainties. But now that you have a new understanding of the monetary policy process, I hope you will share my belief that the FOMC has proven to be an effective mechanism for making sound decisions for the health of our economy.
What is Monetary Policy?
Monetary policy refers to the Fed's control of the supply of money and credit in the economy. The goals of monetary policy are stated explicitly in the Federal Reserve Act. They are maximum employment, stable prices, and moderate long-term interest rates.
To achieve these ends the Fed must ascertain where the economy is headed and if that direction is appropriate. If not, the Fed must take action to move the economy in a direction that fosters its objectives.
The Fed's primary monetary policy lever is the federal funds rate. Movements in this rate and expectations about those moves influence all other interest rates and asset prices in the economy. In this way, changes in the fed funds rate influence aggregate demand. By affecting demand, open market operations can affect the level of production relative to capacity, as well as inflation pressure in the economy.
So how does this all happen, and who in the Fed is responsible for conducting monetary policy? As you know, the Federal Open Market Committee (FOMC) is widely recognized as the primary decision-making body within the Fed with respect to monetary policy. The FOMC sets the fed funds rate target and oversees the open market operations that the Fed implements to achieve that target.
What is the FOMC?
Congress created the Fed in 1913, but it did not create the FOMC within the Fed until 1935. The history of Federal Reserve open market operations begins in the 1920s, when regional banks began looking for a source of revenue to cover their operating costs. The Fed does not receive an appropriation from Congress. Instead, it funds itself from the return on its assets and fees for its services to banks. So, it was with the intention of funding their operations that Fed Banks began to purchase government securities.
Gradually, it was recognized that the Fed's open market securities transactions had a powerful and immediate impact on short-term interest rates and the supply of money and credit. Therefore, over time open market operations became the central tool for carrying out monetary policy.
In 1935, Congress established the legal structure of the FOMC within the Fed and granted its current responsibilities. The FOMC brings together the Fed's Board of Governors in Washington and the Reserve Bank presidents from around the country. Fed Governors are appointed by the President of the United States, and Reserve Bank presidents are selected by their Boards of Directors, subject to Board approval. The FOMC is therefore a blend of national and regional representatives from both the public and private sectors. Its operations are conducted through the System Open Market Desk at the Federal Reserve Bank of New York.
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