Federal Reserve & FOMC
By: YBB Personal Finance
The US Central Bank structure & operations are complicated. The Federal Reserve Act (1913) made the FEDERAL RESERVE (the Fed) the US Central Bank. Unlike most central banks, the Fed has a DUAL MANDATE for controlling inflation & unemployment. The Fed transfers all profits from its operations to the US Treasury & may also tap into the US Treasury for deficit operations. As is typical with the central banks, their profits & losses are just for bookkeeping & don’t have any impact on their operations; in particular, they don’t go bankrupt when they have deficit operations.
The Federal Reserve Board (FRB) with 7 Governors is an independent US government institution. Its members are nominated by the President & confirmed by the Senate. One of the Governors, or another person, can be similarly nominated & confirmed as the Federal Reserve Board Chair (the Fed Chair); a Fed Vice-Chair is also nominated & confirmed. The terms of the Fed Chairs & the US Presidents are staggered by about 2 years. There is a tradition of regular meetings between the Fed Chair & the Treasury Secretary. The Fed Chair also appears semiannually before the House & Senate subcommittees. There are continuing debates on Fed independence.
There are 12 DISTRICT Federal Reserve Banks that are private institutions with government charters & some government supervision. These have their owns boards, operations & hiring procedures. Their primary functions are to keep tabs on their regional economies, provide feedback to the Federal Reserve & participate in setting the US Monetary policy on a rotating. Besides the NY district, the 4 Groups of 11 Fed Districts are (1) Boston, Philadelphia, Richmond, (2) Cleveland, Chicago, (3) Atlanta, St. Louis, Dallas, (4) Minneapolis, Kansas City, San Francisco.
The FOMC (Federal Open Market Committee) is a public-private entity with 12 members: 7 Fed Governors & 5 district Federal Reserve Bank Presidents – the NY Fed & 4 annually rotating district Fed Presidents (& their alternates) with one from each of the 4 Groups above. All 12 district Fed Presidents participate in the FOMC meetings, but only 5 have formal votes. The NY Fed has additional responsibilities for executing the monetary policy; it’s a permanent member of the FOMC & the NY Fed President is also the FOMC Vice-Chair (that’s different from the Fed Vice-Chair).
The FOMC meets 8 times in a year, typically every 6 weeks, issues the FOMC Statement & then the Fed Chair has press conference. The FOMC Minutes are published with some delay. The interest rate decisions are announced at the conclusion of the FOMC meetings, but intermeeting decisions are also possible. The monetary policy actions of the FOMC are final & not subject to any further review or approval. Pay attention to whether the district Fed Presidents in the media are members of the FOMC.
MONETARY POLICY refers to the actions of the Fed & the FOMC – rate-setting (fed fund rate, discount rate, interest on bank reserves); buying/ selling Treasuries & agency MBS, a process called QE/ QT (quantitative easing/ tightening); serving as the lender of last resort to banks (Discount Window operations); controlling the amount of currency in circulation; providing dollar swap lines to other central banks, etc. Some lesser used tools include setting required bank capital & reserve ratios, initial stock margins for brokerages (Reg T; 50% since 1974), etc. So, almost everything related to money except printing of the currency, issuing the US debt & the dollar policy – those are handled by the US TREASURY.
The CME FedWatch is a tool based on the current fed fund futures quotes around the future FOMC meetings & the assumption of fed fund rate change steps of +/- 0.25% (25 bps). It jumps around a lot but provides real-time data on the rate expectations of the fed fund futures traders. This is different from the rate opinions offered by “experts” or those based on opinion surveys of strategists or institutions.
FISCAL POLICY is in the hands of the Congress & the President. It can involve tax incentives, spending for infrastructure & other programs to boost the economy. It has done so especially in times of wars, recession or depression (1929-39, GFC 2008-09) or pandemics (2020). The monetary & fiscal policies should be coordinated, but sometimes they are at odds. The Fed can act much quicker on monetary policy, but the Congress is often slower with fiscal policy because the consents required by the House, the Senate & the President.
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