Although it is little-known by the general public, the Federal Reserve’s FOMC (Federal Open Market Committee) has a significant impact upon the U.S. economy. The FOMC is made up of twelve members who meet at least eight times per year, according to philadelphiafed.org. Members include the presidents of twelve Federal Reserve banks, as well as a Board of Governors. The FOMC is responsible for regulating transactions in open market securities. Various economic statistics and predictions are presented at the meetings, then members discuss lowering or raising the federal funds interest rate and vote on what changes should occur. For example, the FOMC lowered the rate by 0.75% on March 18th. Banks must pay this rate when borrowing money from reserve funds that all banks are required to maintain.

The expense to banks of paying the federal funds interest rate causes them to raise or lower the rates charged to customers on the various types of loans they offer, including credit cards, auto loans, and mortgages. This often affects the amount of purchases on credit that people make, thus indirectly impacting the stock market, inflation, employment levels, and other economic factors. Part of the FOMC and Federal Reserve’s intended goal is to promote economic prosperity and employment, without causing inflation to rise dramatically. It also makes decisions regarding international currency transactions, and releases statements on general trends or expectations for the economy.

The level of influence the FOMC has over the economy is largely dependent upon how many people use credit when making purchases. Interest rates would have little impact upon sales or inflation if most purchases were made using cash that has already been earned, as they are in some countries. However, the widespread usage of credit cards and consumer-oriented loans among Americans seems unlikely to change in the near future, thus ensuring that the FOMC continues to have a significant role. It is worth mentioning that federal funds rate changes are often indicated in “basis points” by the FOMC; these are equal to 1/100th of a percent, so a fifty basis point increase is the same as 0.5 percent.

Although (at first) the power of the FOMC seems as if it would only affect banks, its decisions can actually have a wide-ranging effect on the U.S. economy, and even that of the world, because of what occurs indirectly as a result.