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How the FOMC works
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May 18, 1999: 2:13 p.m. ET
Setting interest rate policy is not as complicated as it probably seems
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NEW YORK (CNNfn) - The Federal Reserve, the nation's central bank, affects the speed of the U.S. economy and influences interest rates around the world.
Following are some key terms associated with the Fed and its interest rate policies:
Federal Open Market Committee: The FOMC meets eight times per year to set monetary policy, via its control over key interest rates. The chairman of the FOMC, and of the Federal Reserve itself, is Alan Greenspan. The 12-member committee includes the seven members of the Fed's Board of Governors, the president of the Federal Reserve Bank of New York and four presidents from the 11 other regional Reserve Banks who serve one-year terms.
Interest rate bias: The Fed's bias provides financial market participants with a hint which direction the Fed's governors are leaning in monetary policy. An official announcement of a change in the Fed's bias -- or inclination toward future rate action -- alerts individuals and financial markets that the Fed is considering adjusting rates sometime in the near future. The Fed changed its policy recently to allow it to announce bias changes immediately following its meetings, rather than waiting six weeks to release the official minutes from the meeting, as was its practice in the past.
Fed funds rate: A target interest rate the Fed can adjust from time to time to influence the interest rate individual banks in the U.S. can charge each other to borrow money overnight. The rate currently stands at 4.75 percent.
Discount rate: The discount rate, which currently rests at 4.5 percent, is the true foundation for interest rate policy within the Fed. The discount rate is the rate of interest that the central bank would charge commercial banks to borrow money if they needed it. This option is rarely exercised, however, since most U.S. banks lend money to each other. This rate is used mainly as a barometer for where interest rates should be.
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Federal Reserve Board
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