Retirees, savers and anyone who turns on the television lately has heard repeatedly, what is the Fed Reserve or FOMC going to do? News headlines have focused more on where interest rates are and where they are heading. What exactly are the Federal Reserve and the FOMC and what do they do?
Congress created the Federal Reserve System in 1913 to act as the nation’s central bank. The Federal Reserve System consists of a Board of seven Governors and twelve Reserve Banks. The original goal of the Federal Reserve was to provide the nation with a more stable monetary and financial system. Today the Federal Reserve conducts the nation’s monetary policy, maintains the stability of the financial system, regulates the banking industry and provides financial services to banks, the U.S. government and foreign institutions.
The President appoints the Board of Governors and the Senate confirms the appointment. Each Governor serves a 14-year term with staggered terms so that a Governor position opens every other year. The Chairman and Vice Chairman of the Board go through the same appointment process and serve a four-year term in that position.
The Federal Open Market Committee or FOMC conducts the nation’s monetary policy. The Committee meets eight times per year to vote on monetary policy. The FOMC reviews economic and financial conditions and the effects on their long-term goals of maximum unemployment and stable inflation currently targeted at 2%.
The FOMC has twelve voting members. The seven members of the Board of Governors of the Federal Reserve System, the president of the Federal Reserve Bank of New York and four of the remaining eleven Reserve Bank presidents serve as voting members. The remaining Reserve Bank presidents serve one-year terms on a rotating basis. The non-voting Reserve Bank presidents attend meetings and participate in the discussion on the state of the economy and policy options. As a tradition, the FOMC elects the Chairman of the Board of Directors as the Chairman of the FOMC and the President of the Bank of New York as the Vice Chairman.
Historically the FOMC has been concerned mainly with the domestic economy, employment and inflation and rarely mentioning economic conditions outside of the United States. Today there is dissent among the FOMC members. While many members remain centered on domestic issues, others have more of an international viewpoint. Theses members are considering global growth and employment in making monetary policy decisions. This new tilt to looking at the world economy in conjunction with domestic economic data led the FOMC to slow the pace of interest rate increases that the Committee originally wanted to make in 2016. The new projection from the FOMC is one to two interest rate hikes this year.
Slower global growth and lower global inflation will likely continue to play a role in the FOMC decisions for raising short-term interest rates in the United States. If you want to learn more about interest rates and how they affect your portfolio, contact your advisor today.
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