How Fed Policymakers Affect the Economy

The Federal Reserve said Wednesday that the U.S. economy “paused” in recent months due to temporary factors, and reaffirmed its commitment to try to stimulate growth by keeping borrowing costs low for the foreseeable future.

The Fed took no new action at its two-day policy meeting. But it stood behind aggressive steps it launched in December to try to reduce unemployment, in a statement released after the meeting.

In December, the Fed said it would keep its key short-term interest rate at a record low at least until unemployment falls below 6.5 percent. Unemployment is currently at 7.8 percent. And the Fed said it would keep buying $85 billion a month in Treasurys and mortgage bonds to try to keep borrowing costs low and encourage spending.

The Federal Reserve’s chief policymaking group, the Federal Open Market Committee (FOMC), has vast power over the economy through its ability to set monetary policy.

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 inflationary 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 that 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; James Bullard, president of the Federal Reserve Bank of St. Louis; Charles Evans, president of the Federal Reserve Bank of Chicago, Esther George, president of the Federal Reserve Bank of Kansas City, and Eric Rosengren, president of the Federal Reserve Bank of Boston.

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. This year, each of its meetings will take place over two days to allow more time for discussion.

Q: When does the FOMC announce its rate decisions?

A: It depends. Four of each year’s meetings produce only a statement around 2:15 p.m. once the meeting ends. That was the case Wednesday. For the four other meetings, Chairman Ben Bernanke holds a news conference around 2:15 p.m. on the second day. On those occasions, the Fed issues a statement earlier, around 12:30 p.m. The Fed has said that having a predictable time for its announcements helps investors digest and react to its policy decisions.

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. Last year, all Fed policy decisions were approved on 11-1 votes, with Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, dissenting at all eight meetings. Lacker was concerned that the Fed’s policies could lead to higher inflation. He does not have a vote this year.

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 2010 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 that 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.