Federal Reserve Open Market Committee (FOMC) for 2011

Each January there is turnover of at least four of the eleven seats on the Federal Reserve Open Market Committee (FOMC). The Board of Governors of the Federal Reserve System is responsible for the discount rate and reserve requirements, and the Federal Open Market Committee is responsible for open market operations. Here is a link to a previous post with some additional background on the FOMC and the nine 2010 members.

The new members for 2011 will be presidents from four of the 12 Regional Bank Branches. The four Branches are in Chicago, Philadelphia, Dallas and Minneapolis. In addition, Janet Yellen, President of the San Francisco Branch, and Sarah Bloom Raskin, formerly the Commissioner of Financial Regulation for the State of Maryland, (the state ranks #12 as of 12/31/2010 on the unofficial problem bank list) were each appointed Governor's on The Fed Board last October, making them long-term members. In Yellen's appointment her vote is retained past 2010 because her Branch moves to the non-voting alternate member list for the 2011 term. Non-voting Reserve Bank presidents attend the meetings of the Committee, participate in the discussions, and contribute to the Committee's assessment of the economy and policy options.

Below is a look at representative quotes from speeches made recently by each ot the new members. Bloom Raskin has given only one speech as a board member. These might provide helpful background when the time comes to speculate about whether the program of quantittative easing gets extended. The current program is scheduled to stop by the end of June 2011.

The speech by Kocherlakota is given to an audience of college students and so he talked in terms that more people can understand. Many of the other speeches are weighted with econo jargon. Never-the-less, a quick browse will be enlightening for understanding more about the Fed's practices and plans for managing through the policy challenges that the economies of the world are faced with.

The Fed's Exit Strategy is Shaping Up

Bernanke was scheduled to deliver testimony today before the Committee on Financial Services, U.S. House of Representatives. It was cancelled due to snow but the press release is available. Here is much of the planned testimony as it relates to the exit strategy and tools in their warchest. When we have more time to study this, there will be more fuel for the discussion on inflation and deflation. Perhaps we can better describe what the Fed policy implications could be.

The Federal Reserve has a number of tools that will enable it to firm the stance of policy at the appropriate time.

Most importantly, in October 2008 the Congress gave the Federal Reserve statutory authority to pay interest on banks' holdings of reserve balances. By increasing the interest rate on reserves, the Federal Reserve will be able to put significant upward pressure on all short-term interest rates, as banks will not supply short-term funds to the money markets at rates significantly below what they can earn by holding reserves at the Federal Reserve Banks. Actual and prospective increases in short-term interest rates will be reflected in turn in longer-term interest rates and in financial conditions more generally.

 The Federal Reserve has also been developing a number of additional tools it will be able to use to reduce the large quantity of reserves held by the banking system. Reducing the quantity of reserves will lower the net supply of funds to the money markets, which will improve the Federal Reserve's control of financial conditions by leading to a tighter relationship between the interest rate on reserves and other short-term interest rates.