Question

What is the FOMC, who serves on the committee and what important decision does this committee make that affects every American?

Answer 1

The Federal Open Market Committee is the monetary policy branch of the Federal Reserve System , the United States Central Bank. This works with the Board of Governors of the Federal Reserve to track the three monetary policy instruments. The FOMC is in charge of free market operations. The Board shall set the discount rate and the reserve condition.

The Fed's inflation target is 2%. It wants rates to rise by 2% every year. People expect inflation when this happens. It motivates them to buy more now than later. A low inflation rate increases demand, and this is good for economic development. The FOMC uses expansionary monetary policy to reduce unemployment. That boosts economic growth by increasing the supply of capital. It reduces rates to boost economic growth and minimize unemployment. FOMC participants who are in support of this strategy are considered dovish.

The Committee adjusts interest rates by setting a target for the rate of the fed funds. This is the rate at which banks charge each other for overnight loans known as fed funds. Banks use these loans to ensure that they have enough to fulfill the Fed's reserve requirement. Banks will keep this balance every night at their nearest Federal Reserve bank or in cash in their vaults. The Committee shall make its decisions clear at its eight meetings a year. It explains its actions by commenting on how well the economy is performing, particularly inflation and unemployment.

Americans are influenced by the FOMC by monitoring the rate of the fed funds. Banks are using this rate to direct all other interest rates. As a result, the pace of the fed funds regulates the availability of capital to invest in households, companies, and eventually your income and investment returns. This directly impacts the valuation of your retirement account, the cost of your next mortgage, the sales price of your home, and the potential for your next rise.