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INCENTIVE: A cost or benefit that motivates a decision or action by consumers, businesses, or other participants in the economy. Some incentives are explicitly created by government policies to achieve a desired end or they can just be part of the wacky world we call economics. The most noted incentive in the study of economics is that provided by prices. When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the . When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the allocation. When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the allocation system that society uses to answer the three questions of allocation.

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FEDERAL OPEN MARKET COMMITTEE:

A committee of the Federal Reserve Board that is charged with conducting open market operations and is more generally responsible for guiding monetary policy. It is comprised of the 7 members of the Board of Governors and the Presidents of 5 Federal Reserve District Banks. The Federal Open Market Committee (FOMC) meets about eight times a years, on average every six weeks, usually on a Tuesday, to set the course of monetary policy. The Chairman of the Federal Reserve Board is also the Chairman of the FOMC. The President of the New York Federal Reserve Bank is always on this committee and is invariably selected as the Vice Chairman of the FOMC.
The Federal Open Market Committee (FOMC) is undoubtedly the most important standing committee of the Federal Reserve System. The FOMC is specifically charged with guiding open market operations, the buying and selling of U.S. Treasury securities to control the money supply with the multi-faceted goal of limiting business-cycle instability and promoting economic growth. The FOMC typically meets every six weeks in Washington, D.C., more often it needed, to evaluate the course of monetary policy.

Federal Open Market Committee
Federal Open Market Committee
The exhibit to the right, commonly termed the Federal Reserve pyramid, indicates the connection between the Federal Open Market Committee and the rest of the Federal Reserve System. The Federal Open Market Committee is connected directly to the Federal Reserve Board of Governors at the top of the pyramid.

7 + 1 + 4

The Federal Open Market Committee is comprised of 12 voting members.
  • The Board Rules: The 7 members of the Federal Reserve Board of Governors form the voting majority of the Federal Open Market Committee. This is intended to keep primary control of monetary policy in the hands of the Board, which is after all the supervising authority of the Fed. Should the Federal Reserve Board desire to pursue a given monetary policy, then it can easily do so through the FOMC with a majority vote. As might be expected, the Chairman of the Federal Reserve also functions as the Chairman of the Federal Open Market Committee meetings.

  • New York, New York: Because New York City is the financial center of the country, the President of the New York Federal Reserve Bank is always on the FOMC and is invariably selected as the Vice Chairman. The New York Federal Reserve Bank is charged with carrying out specific policy actions. The permanent membership of the New York Federal Reserve Bank President gives the FOMC a direct line to policy implementation.

  • With a Little Help: The remaining 4 voting slots on the FOMC are shared and rotated among the remaining 11 District Banks. One slot is shared by Boston and Philadelphia. Another is shared by Dallas, Atlanta, and Kansas City. A third by Cleveland, Chicago, and Richmond. And the fourth by San Francisco, Minneapolis, and St. Louis. The Federal Reserve District Bank Presidents serve one-year terms as voting members. Actually the Presidents of all 12 Federal Reserve District Banks are present at committee meetings, and contribute to discussions, providing input and perspectives from their individual districts. However, only 5 serve as voting members at any given time.
The 7 + 1 + 4 composition keeps the bulk of authority and power in the hands of the Board of Governors and the Chairman (the 7), while at the same time maintaining a channel for implementing monetary policy through the New York Federal Reserve Bank (the 1), as well as providing a decentralized nationwide input from the rest of the country through other Federal Reserve District Banks (the 4).

Open Market Operations

The primary purpose of the Federal Open Market Committee is to direct open market operations, the buying and selling of U.S. Treasury securities. Open market operations ultimately affect the amount of reserves held by commercial banks, which affects interest rates and the money supply.
  • Buy, Buy, Buy: When the Fed buys U.S. Treasury securities, banks end up with more reserves. This induces a decrease in interest rates and subsequently an increase in the money supply.

  • Sell, Sell, Sell: When the Fed sells U.S. Treasury securities, banks end up with fewer reserves. This induces an increase in interest rates and subsequently a decrease in the money supply.
The actual buying and selling of U.S. Treasury securities takes place through the Domestic Trading Desk of the Federal Reserve Bank of New York. Once the Open Market Committee decides on a course of open market operations, the President of the New York Federal Reserve Bank passes this information along to the Domestic Trading Desk. Orders to buy or sell are then placed with a select group of securities dealers who specialize in the exchange of U.S. Treasury securities.

When the Fed buys it pays for the securities by adding reserves of the banks of the securities dealers doing the selling. When the Fed sells it receives payment for the securities by reducing reserves of the banks of the securities dealers doing the buying. The banks then react to any changes in reserves by adjust interest rates and lending activity that affects the money supply through the money creation process.

The Fed uses open market operations for monetary policy because the transactions are quick, easy to control, and can be implemented with a great deal of precision.

Open market operations actually come in two varieties--reactive and proactive.

  • Reactive open market operations respond to day-to-day economic and banking conditions. They are designed to stabilize the normal ebb and flow of banking activity without seeking an overall increase or decrease in the money supply. The Fed might buy securities one day to counter a temporary reduction in reserves caused by unusual cash withdrawals, the sell securities a few days to counter a temporary increase in reserves caused by a big influx of end-of-the-month paychecks Reactive operations generally balance out over the course of a few days--a little buying one day, then a little selling the next. Without such operations, the banking operations would be a great deal more volatile.

  • Proactive open market operations are intended to change the overall money supply to stabilizing business cycles, reduce unemployment and inflation, and promote economic growth. Proactive operations are longer term and sustained. The Fed might continue to buy securities over a period of several days or weeks as it seeks to increase the money supply and stimulate the economy. Alternatively, it might sell securities for an extended period to decrease the money supply and reduce inflation.

<= FEDERAL FUNDS RATEFEDERAL RESERVE BANKS =>


Recommended Citation:

FEDERAL OPEN MARKET COMMITTEE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2017. [Accessed: October 24, 2017].


Check Out These Related Terms...

     | monetary economics | monetary policy | central banking | Federal Reserve pyramid | Federal Reserve System | Chairman of the Board of Governors, Federal Reserve System | Board of Governors, Federal Reserve System | Federal Reserve Banks | Federal Advisory Council | open market operations | discount rate | reserve requirements |


Or For A Little Background...

     | fractional-reserve banking | banks | money | bank reserves | bank panic | business cycles | check clearing | money creation | macroeconomics |


And For Further Study...

     | Federal Deposit Insurance Corporation | Comptroller of the Currency | monetary aggregates | barter | aggregate market | unemployment | inflation | bank balance sheet | gross domestic product | circular flow | goldsmith money creation |


Related Websites (Will Open in New Window)...

     | Federal Open Market Committee | Federal Reserve System | Federal Reserve Bank of New York |


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