Twelve people vote on US interest rates. Seven of them are the governors who sit on the Federal Reserve’s Board in Washington. The rest come from the regional Reserve Banks, and which of those presidents get a vote changes every year.
Together they form the Federal Open Market Committee, the body that decides how the Federal Reserve steers the cost of money.
Who has a seat
The FOMC’s twelve voting members are the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the other eleven Reserve Bank presidents. Those four serve one-year terms on a rotating basis. The New York seat never rotates.
The rotating seats are filled from four groups of Banks, with one president from each. Boston, Philadelphia and Richmond make up one group. Cleveland and Chicago form another. Atlanta, St. Louis and Dallas are the third, and Minneapolis, Kansas City and San Francisco the fourth. Membership changes at the first regularly scheduled meeting of the year.
Presidents without a vote still attend. They take part in the discussion and add to the committee’s assessment of the economy and the policy options. The Fed’s current listing names Kevin Warsh as chairman, with Philip N. Jefferson and Christopher J. Waller among the governors.
What the committee controls
Monetary policy means the steps a central bank takes to influence the availability and cost of money and credit. The Federal Reserve Act of 1913 gave the Fed that job. It has three tools: open market operations, the discount rate and reserve requirements. The Board of Governors is responsible for the discount rate and reserve requirements. The FOMC handles open market operations.
Using the three tools, the Fed affects the demand for and supply of the balances that banks hold at Federal Reserve Banks. That moves the federal funds rate, the rate at which depository institutions lend those balances to one another overnight.
A change there sets off a chain reaction. Other short-term interest rates move, then foreign exchange rates and long-term interest rates, then the amount of money and credit. In the end it reaches employment, output and the prices of goods and services.
The committee meets eight times a year on a regular schedule. At each meeting it reviews economic and financial conditions, decides the right stance for monetary policy and weighs the risks to its long-run goals of price stability and sustainable economic growth.
