Ask who sets US interest rates and the answer splits in two. The Federal Reserve holds three levers: open market operations, the discount rate and reserve requirements. Two different bodies pull them.
The Board of Governors is responsible for the discount rate and for reserve requirements. The Federal Open Market Committee, or FOMC, handles open market operations. Congress gave the Fed responsibility for monetary policy in the Federal Reserve Act of 1913, and the term covers anything a central bank does to influence how available and how costly money and credit are, in service of national economic goals.
All three tools aim at the same target. By changing the demand for and supply of the balances that banks hold at Federal Reserve Banks, the Fed moves the federal funds rate, the overnight rate at which one bank lends those balances to another.
That rate does not stay put. A change in it sets off a chain reaction through other short-term rates, foreign exchange rates and long-term rates, then through the amount of money and credit in the economy. Employment, output and the prices of goods and services follow.
Who votes
The FOMC has twelve members. Seven are the governors on the Board, and one is the president of the Federal Reserve Bank of New York. The last four are other Reserve Bank presidents, who serve one-year terms on a rotating basis. Each rotating seat comes from a fixed group of banks: Boston, Philadelphia and Richmond; Cleveland and Chicago; Atlanta, St. Louis and Dallas; Minneapolis, Kansas City and San Francisco.
Presidents without a vote still attend the meetings, join the discussion and feed into the Committee’s reading of the economy and its policy options.
The current roster lists Kevin Warsh as chairman, with Philip N. Jefferson and Christopher J. Waller from the Board, Sushmita Shukla as First Vice President of New York, and Cheryl Venable as interim president in Atlanta.
The Committee holds eight regularly scheduled meetings a year. Members review economic and financial conditions, settle on the stance of policy and weigh the risks to the Fed’s long-run goals of price stability and sustainable growth. Membership changes at the first regular meeting of the year.
