SIMON BROWN: $o much interest in the F€d

The Federal Open Market Committee (FOMC) has been all over the news recently, mostly for the wrong reasons as President Donald Trump threatens Fed chair Jerome Powell and fires Fed governor Lisa Cook. Essentially trying to usurp the committee in order to get his own people on the board who would be more agreeable to cutting US rates.

In the past we only really cared about the FOMC eight times a year, when it met to decide on US interest rates. However, now its independence is under threat, let’s explore how it works.

The Federal Reserve Act of 1913 was passed by congress, creating the Federal Reserve System and today it has a dual mandate; price stability (low inflation) and full employment. Then in 2012 under chair Ben Bernanke the inflation target of 2% was introduced.

For much of its history the Fed’s only tool to carry out its dual mandate was interest rates. But after the 2008/2009 crisis it has also used quantitative easing and, more recently, quantitative tightening.

The FOMC is a body of the Fed that sets interest rates with 12 members who vote. The 12 are made up of seven members of the board of governors of the Federal Reserve System and five members from the 12 Federal Reserve banks.

These Federal Reserve Banks each cover a different area of the US and the New York Fed president is a permanent member of the FOMC. The remaining four positions are rotated annually between the remaining 11 Federal Reserve banks presidents.

The seven members of the board of governors are nominated by the US president and confirmed by the Senate and serve staggered 14-year terms. The terms are staggered at two-year intervals to prevent any president having too much influence in nominating members.

The chair of the Federal Reserve, and as such the FOMC, is nominated by the president from the board of governors and confirmed by the Senate for a four-year term. They can be reappointed multiple times, as was the case with Powell in 2021 after he’d initially been nominated by Trump in 2017.

Powell joined the Fed in 2012 to take over an unexpired term and was officially nominated for his 14-year term in 2014. So though his position of fed chair expires next year in May, in theory he remains on the board until 2028.

Voting on interest rates is by all 12 members of the FOMC while the other seven Federal Reserve banks presidents attend the meetings and are involved in the discussions, but they are nonvoting.

The entire process was designed to prevent what Trump is trying to do, pack the FOMC with his supporters who will reduce rates regardless. With a recent resignation, the firing of Cook, the possible retirement of Powell next year and a few sympathetic members already on the board, the Fed would lose all the independence that it has spent a century building.