Federal Reserve System -the Fed – and the FOMC

Federal Reserve System (the Fed) and the FOMC

  •  The US Federal Reserve System (Fed) is the central bank of the US. It is comprised of a seven-member Board of Governors in Washington, DC and the 12 regional Federal Reserve Banks located in various cities around the country.
  • The Federal Open Market Committee (FOMC) is the main decision-making body of the Fed.
  • One main difference between the Fed and other central banks is its mandate. Most central 
banks only have to keep inflation in check, while the Fed is required to promote both maximum employment as well as stable prices. These goals are sometimes seen as contradictory, which creates a tension that other central banks don’t have.

The US central bank is different than most other countries’ central banks. Instead of having one central bank, the US has a federal system that comprises a central governmental agency (the Board of Governors) in Washington, DC and 12 regional Federal Reserve Banks located in various cities around the country (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco). These banks together are known as the Federal Reserve System, or collectively the Fed for short. This is somewhat like the European Central Bank (ECB), which works along with the central banks of each country. Each regional Federal Reserve bank issues its own dollars, just like each of the central banks of Europe issues euros. If you look on a dollar bill you can see which bank issued it, the same as with euros. 
The regional banks operate under the general supervision of a Board of Governors, located in Washington, DC. There are seven members of the Board, who are nominated by the President. The President designates, and the Senate confirms, two members of the Board to be Chairman and Vice Chairman for four-year terms. The Chairman of the Board of Governors of the Federal Reserve System (his official title) is currently Janet Yellen and the Vice Chairman is Stanley Fischer. 
The most important decision-making body at the Fed is the Federal Open Market Committee (FOMC). The FOMC meets periodically to make the key decisions affecting the cost and availability of money and credit in the economy. The committee adjusts credit largely by determining policy concerning purchases and sales of government securities in the open market (hence the committee’s name). It is therefore the policy-making committee of the Fed, much like the Monetary Policy Committee of the Bank of England or Bank of Japan, or the ECB’s Governing Council. 
The FOMC is made up of the seven members of the Board of Governors, plus five of the twelve presidents of the Federal Reserve Banks. The president of the New York Fed is always on the FOMC; the other presidents serve one-year terms on a rotating basis, with some guidelines to ensure that all regions and commercial sectors (industrial, agricultural, financial, etc.) are fairly represented. By tradition the FOMC elects the Chairman of the Board of Governors as its Chairman and the President of the New York Bank as its Vice Chairman.

There are some technical differences between the way the Fed works and the way other central banks work. In most central banks, the Monetary Policy Committee makes all the major decisions. At the Fed however the Board of Governors sets reserve requirements for banks and shares the responsibility with the regional Feds for discount rate policy, the rate of interest on loans made by regional Feds to depository institutions at the “discount window.” The FOMC is responsible for open- market operations, as mentioned above. But these distinctions are often just a technicality, since the presidents of several regional Feds and all of the Governors are on the FOMC so there is not so much difference between them. All of their activity is reported as “The Fed did such and such…”

Another difference between the Fed and other central banks is its mandate. Most major central banks nowadays are technically independent of their governments, but the laws establishing them spell out their mandate – that is, the guiding principle or principles that their governments require them to follow in setting monetary policy. For the majority of central banks, this mandate is something like to maintain price stability and financial stability or to maintain the integrity of the currency. In general this boils down to a single goal: keeping inflation low.
The Fed on the other hand has what is called a dual mandate. The law establishing the Fed says, “”The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” While there is no long- term trade-off between maximum employment and stable prices (a country with 25% inflation is not going to have maximum employment) there can be a trade-off in the short term. This dual mandate means the FOMC may have bigger policy difference than the governing councils of other central banks, because different members of the FOMC may put a different emphasis on which of the two goals is more important at any given time, thereby causing policy disagreements.
Each Federal Reserve Bank has a research staff to gather and analyze economic data. They all make reports and publish journals and economic data. For example, there is the “Philly Fed” survey – the Philadelphia Federal Index of business activity, done by the Philadelphia Fed – The “Empire State manufacturing survey” by the New York Fed (New York’s nickname is “The Empire State”), etc. The St. Louis Fed runs a big database of economic data, known as FRED (Federal Reserve Economic Data). The San Francisco Fed specializes in analyzing the Asian economies. Etc.

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Paul Bratby
Paul is an ex British Soldier who served 17 years an Engineering Manager in the British Army. Since leaving the Army he has held high level positions in Companies around the globe with the most recent running the Liberia (West Africa) Country Operations for a Gold Exploration and Mining Company. In 2014 he launched www.mytradingbuddy.com which continues to grow massively as a free resource to all traders.
He has been trading his own pension and savings accounts full time and has written an electronic trading journal which he will publishing as a book in the near future.
Paul Bratby

Paul Bratby

Paul is an ex British Soldier who served 17 years an Engineering Manager in the British Army. Since leaving the Army he has held high level positions in Companies around the globe with the most recent running the Liberia (West Africa) Country Operations for a Gold Exploration and Mining Company. In 2014 he launched www.mytradingbuddy.com which continues to grow massively as a free resource to all traders. He has been trading his own pension and savings accounts full time and has written an electronic trading journal which he will publishing as a book in the near future.

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