Wednesday, December 12, 2012 12:48 pm
How Fed policymakers affect the economy
By The Associated Press
Here is a look at how the FOMC operates.
Q: What is the FOMC's primary role?
A: Its mission is to keep the economy, inflation and employment on a healthy track. When the economy weakens, Fed policymakers cut interest rates or keep them low. The lower interest rates are aimed at promoting increased borrowing and spending by consumers and businesses to spur economic growth. When the economy grows so fast that inflation becomes a threat, Fed policymakers raise rates or keep them high. That makes it costlier for people to get loans and means less borrowing and spending. Economic activity slows and inflation pressures ease.
Q: How does the FOMC move interest rates?
A: Its policymakers decide whether to buy securities from banks. The banks sell those securities to the Fed and receive money from the Fed which they can use to make more loans. That acts to lower the interest that banks charge for those loans. Conversely, if the Fed wants to raise interest rates, it sells Treasury securities to the banks, pulling money out of the financial system and raising the cost for loans. The Federal Reserve Bank of New York is responsible for conducting these operations. After the financial crisis struck in 2008, the Fed pursued other, more unconventional steps to aid the economy. Among other actions, it bought more than $2 trillion in Treasury and mortgage-backed securities. The goal was to drive down long-term interest rates, to spur more borrowing and spending and lift stock prices.
Q: Who's on the FOMC?
A: It's composed of:
- The Fed's Board of Governors in Washington, which has seven members.
- The president of the Federal Reserve Bank of New York.
- Four of the remaining 11 presidents of the Fed's regional banks. They serve one-year terms on a rotating basis.
The current roster of voting members: Fed Chairman Ben Bernanke, Vice Chairwoman Janet Yellen, and Fed Governors Elizabeth Duke, Jerome Powell, Sarah Bloom Raskin, Jeremy Stein and Daniel Tarullo, all based in Washington; William Dudley, president of the Federal Reserve Bank of New York; Jeffrey Lacker, president of the Federal Reserve Bank of Richmond; Sandra Pianalto, president of the Federal Reserve Bank of Cleveland; Dennis Lockhart, president of the Federal Reserve Bank of Atlanta; and John Williams, president of the Federal Reserve Bank of San Francisco.
Q: How often does the FOMC meet?
A: It regularly meets eight times a year at the Fed's Washington headquarters. During the financial crisis, the FOMC also held emergency meetings, mostly by video conference. It also began holding some of its meetings over two days rather than one to allow more time for discussion. In May, the Fed said that for the rest of this year and next year, all its meetings will last two days.
Q: Why are most of the FOMC's rate decisions issued around 2:15 p.m.?
A: Having a consistent time helps investors digest and react to the Fed's policy decisions. Issuing decisions when the markets are open gives Fed policymakers instant feedback from investors.
Q: Why are some of the FOMC's rate decisions issued around 12:30 p.m.?
A: For the first time in the Fed's history, Bernanke last year began conducting regularly scheduled news conferences to discuss the Fed's economic forecasts. Bernanke now holds four news conferences a year, following the meetings where the Fed updates its forecasts. On days, like Wednesday, when Bernanke holds a news conference, the Fed's rate decision is announced at 12:30 p.m. instead of 2:15 p.m.
Q: How are the FOMC's rate decisions approved?
A: By a majority of the 12 voting members. Unlike the Supreme Court, close votes on the FOMC are rare. It might unnerve financial markets if investors felt that the Fed chairman was unable to command widespread support for his policies. Twice last year, three members dissented from the Fed's policy statement. It was the most dissenters in nearly 20 years. The three opposed the Fed's drive to keep rates at super-lows, for fear it could ignite inflation. Those three are no longer voting members. Still, after each of the Fed's eight policy meetings this year, Lacker alone has objected to the Fed's statement, as he did Wednesday. He, too, is concerned that the Fed's policies could lead to higher inflation.
Q: How are Fed officials selected?
A: The president nominates the Fed chairman and his colleagues on the board of governors in Washington. They must be confirmed by the Senate. The presidents of the 12 regional Fed banks are appointed by each bank's board of directors, with approval from the Fed's board. The Dodd-Frank law revamping the nation's financial system bars bankers who sit on the regional boards from voting for the regional bank president. Other local business people serving on the boards still retain their vote. This change was made to address concerns about potential conflicts of interest between the Fed and banks which are regulated by the Fed.
Q: How and why was the Fed created?
A: Congress passed the Federal Reserve Act in 1913. The legislation was signed into law by President Woodrow Wilson on Dec. 23, 1913. The Fed began operating in 1914. It was created in response to a series of bank panics that plagued the United States during the 19th and early 20th centuries. Those panics led to bank failures and business bankruptcies that roiled the economy.