The Federal Reserve’s policy decisions and their effects on the U.S. economy are a frequent topic of discussion among economists, journalists and the general public. But how does the Fed make those decisions?
The Federal Open Market Committee (FOMC) meets regularly to discuss economic conditions and make policy decisions (Off-site). Its goal is to achieve the “dual mandate” (Off-site) as specified by Congress: maximum employment and stable prices in the United States. Currently, the FOMC schedules eight meetings throughout the year (Off-site).
The FOMC consists of 12 voting seats. There are eight permanent voters: the seven members of the Board of Governors and the president of the Federal Reserve Bank of New York. The other 11 Federal Reserve Bank presidents fill out the remaining four voting seats on a rotating basis (Off-site).
While only five Reserve Bank presidents vote at a given meeting, all the presidents attend and participate. If you attended this meeting, you wouldn’t necessarily be able to tell the difference between voters and non-voters. Staff from the Board and individual Reserve Banks, including economists and regulatory experts, also attend the meeting.
Preparing for an FOMC meeting
What you might see in an FOMC meeting is just the tip of the iceberg. These meetings are the culmination of thousands of hours of work and thought that are eventually boiled down to a single policy decision.
To prepare for an FOMC meeting, staff at each of the 12 Reserve Banks collect and summarize information on current economic conditions in their Districts, which then is shared with the public in the Beige Book (Off-site) two weeks before the meeting. Separately, at each Reserve Bank, research groups share information on economic developments and policy choices with the president to better inform their remarks at the meeting.
The Federal Reserve Board staff also shares analysis, forecasts and policy options with FOMC participants. This information allows FOMC participants to formulate a preliminary economic outlook and a corresponding policy response (Off-site). To gather this intel, economists analyze financial data; statistical economic forecasts; data from local businesses, households and consumers; and perspectives from various industries.
Addressing the economic situation and monetary policy in an FOMC meeting
After weeks of preparation, it’s finally time for the FOMC meeting to begin. FOMC meetings take place in Washington, D.C. at the main offices of the Board of Governors. In a 2010 speech called “Come with Me to the FOMC” (Off-site), former member of the Board of Governors Elizabeth A. Duke described the setting for the meeting: a large table, big enough to seat about 25 people, with the Chair of the Federal Reserve sitting at its center. Also at the table are members of the Board of Governors; the president of the Federal Reserve Bank of New York, who serves as vice chair; the deputy secretary of the FOMC; other Reserve Bank presidents; and staff members.
First, meeting participants hear a presentation from the New York Fed’s System Open Market Desk about recent market activity and financial developments in the U.S. and abroad. Staff members also may present in-depth reports on specific issues (Off-site). Then, as part of the “economy round,” each FOMC member shares an analysis of the macroeconomy. These analyses can touch on a broad range of topics, such as labor markets, inflation, banking or financial inequality. Bank presidents’ remarks usually include insights on economic developments in their Districts.
Next comes the “policy round,” which begins with staff presentations on options for monetary policy actions. Then, each FOMC participant discusses their views on the policy recommendations, how to implement that policy, and how to communicate their decision to the public (Off-site). Throughout both rounds of discussion, participants may ask one another questions and offer commentary. After economic and policy discussions conclude, FOMC voting members approve the policy action and an accompanying public statement.
Making and communicating a policy decision
At 2 p.m. Eastern time on the second day of the meeting, the FOMC releases its statement to the public. This statement (Off-site) summarizes the FOMC’s monetary policy decision, provides a rationale for the decision, and discusses economic and financial factors that will continue to inform the FOMC’s future actions (Off-site). The main way the FOMC conducts monetary policy is by adjusting the level of short-term interest rates.
Since 2011, the Chair has held regularly scheduled press conferences after FOMC meetings to address the media and take questions. Finally, the FOMC releases full meeting minutes (Off-site) three weeks after each meeting concludes — and by then, FOMC participants and Federal Reserve staff may have already begun their preparations for the next meeting.
