A Brief History of the FOMC

The decisions of the Federal Open Market Committee [FOMC] influence the cost of borrowing, the rate of price increases, and even the availability of labor. These factors can either drive economic growth or hinder it, so it’s important to follow their actions.

The committee’s responsibilities have evolved over time, but its core structure has remained relatively stable for almost a century. By studying the subtle changes to the FOMC’s goals, business leaders can better understand the committee’s priorities and how they impact the economy.

What Is The FOMC?

Before diving into the history of the FOMC, it makes sense to step back and explore the role of the committee. In short, it is the monetary policymaking body of the Federal Reserve System, and it meets eight times per year – about every six weeks.

The FOMC serves three main functions. The most closely watched of these functions is the setting of the Federal Funds Rate – the rate at which commercial banks lend and borrow from one another overnight. This rate influences other market interest rates including loans, credit cards, and mortgages.

The second function of the FOMC is open market operations. This involves buying or selling securities in the open market to stabilize prices and control the money supply. The widescale purchase of securities by The Fed to stimulate the economy is called quantitative easing, and it has been a popular tool to stabilize markets since The Great Recession. This function also includes the unwinding of QE programs, a process called quantitative tightening where assets are sold back to the open market.

Finally, the FOMC is responsible for communicating with the public. They do this through official statements and press conferences that help the public understand monetary policy actions. This function is important because it sets the stage for future adjustments to policy, and asset markets often react swiftly to these comments.

The Establishment of the FOMC

The FOMC was established by the Glass-Steagall Act in 1933, but its current structure was created two years later with the Banking Act of 1935. This structure has remained relatively stable since that time.

The FOMC is comprised of the Board of Governors, the president of the Federal Reserve Bank of New York, and rotating Reserve Bank presidents. The Board of Governors includes seven members which are appointed by the President and confirmed by the Senate. Active Governors vote at all FOMC meetings.

The sitting president of the Federal Reserve Bank of New York also has permanent voting privileges, while the remaining 11 Federal Reserve Bank Presidents serve one-year rotating terms as voting members. At any given time, there are 4 voting members from these Reserve Banks. The other 7 Reserve Bank presidents attend meetings and participate in discussions but do not vote.

The structure of the FOMC was designed to ensure that all regions of the country are represented at meetings and have the opportunity for their voices to be heard. It was also designed to strike a balance between a centralized authority – the Board of Governors – and regional authority – the Reserve Bank presidents.

The Creation of the Federal Reserve’s Dual Mandate

In 1977, the Federal Reserve Act was amended to have the Fed pursue three goals: stable prices, maximum employment, and moderate long-term interest rates. The last of these goals – moderate rates – is rarely mentioned today, so the Fed is often said to have a dual mandate.

The 3 primary functions of the FOMC listed above are the tools that allow the committee to work toward achieving these goals. They modify interest rates to slow the economy and combat inflation or to stimulate the economy in times of turmoil.

Setting the 2% Inflation Goal

Throughout the two decades following the establishment of the dual mandate, the FOMC worked toward those goals through their monetary policy actions. However, they did not have a standardized target for either the unemployment rate or inflation.

In the mid-1990s, Al Broaddus – president of the Richmond Fed at that time – began to argue that an explicit inflation target could help to shape public opinion and aid the FOMC in achieving its goals. The FOMC apparently decided internally on an implicit target of 2% in 1996, but the information was not made public. The debate surrounding a public inflation target continued for 16 years.

Then in 2012, the FOMC released the Statement on Longer-Run Goals and Monetary Policy Strategy. The statement finally introduced the 2% inflation target to the public.

FOMC Adjusts Inflation Target to “Average” of 2%

In August 2020, the FOMC made a significant change to the Statement on Longer-Run Goals and Monetary Policy Strategy. The language was softened from an explicit inflation target of 2% to an average of 2% – allowing the inflation rate to escalate above the 2% target to achieve the average of 2%.

At the time of the change, inflation had been running below the 2% target for several years. The FOMC stated that inflation below the target can weaken the economy and lead to a cycle of very low inflation. Their resulting change of focus marked the beginning of a long period of inflation that the economy is still experiencing today.

The FOMC Today

Today, the FOMC continues to operate under the original structure using all available tools to promote their dual mandate of maximum employment and stable prices. They have used both the Fed Funds Rate and open market operations throughout the past few years to pull the U.S. out of recession and to promote a healthy labor market.

In recent years, the FOMC has battled inflation with tight monetary policy and quantitative tightening. These efforts were successful in bringing down the inflation rate from multi-decade highs, but it has not yet reached the target average of 2%.

If the committee achieves their stated goals during the current economic cycle, it would represent the first “soft landing” for the economy following a period of significant economic turmoil. They have made great progress thus far, but the final result remains to be seen.

Stay Up to Date on FOMC Actions with Insights From ADM

At American Deposit Management, we keep our finger on the pulse of interest rate decisions. Our articles cover every FOMC meeting with a summary of relevant information to help business leaders stay informed.

You can view past coverage of FOMC meetings on our Insights page and subscribe to our mailing list to have our weekly articles delivered straight to your inbox. Also, don’t forget to follow us on LinkedIn.

If your company needs deposit management solutions that offer access to 100% government protection plus nationally competitive interest rates, reach out to a member of our team today.

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