A guided tour of an FOMC meeting

Editor's note: The following is a presentation of excerpted comments delivered at the UMACHA Payments Conference in Bloomington, Minn., on Oct. 14, 2010. See the Nov. 15 edition of NorthWestern Financial Review for additional conference coverage. .Eight times per year, the Federal Open Market Committee — the FOMC — meets to set the path of short-term interest rates over the next six to seven weeks. All 12 presidents of the various regional Federal Reserve banks — including me — and the seven governors of the Federal Reserve Board contribute to these deliberations. (Actually, in the September meeting, there were only four governors. The good news is that we are back up to six governors, and the White House has nominated Peter Diamond — who just won the Nobel Prize in economics — for the remaining vacancy.) However, the committee itself consists only of the governors, the president of the Federal Reserve Bank of New York, and a rotating group of four other presidents (currently Cleveland, St. Louis, Kansas City, and Boston). I'll be on the committee in 2011..In this way, the structure of the FOMC mirrors the federalist structure of our government. Representatives from different regions of the country — the various presidents — have input into FOMC deliberations. The input from the presidents relies critically on information they receive from their districts about local economic performance. We obtain this information through the work of our research staffs — but we also obtain it from business leaders in industries and towns, in my case, across the Upper Midwest. The Federal Reserve System is deliberately designed so that the residents of Main Street are able to have a voice in monetary policy..So how, exactly, do the FOMC meetings work? The typical FOMC meeting features two so-called go-rounds, in which every president and every governor has a chance to speak without interruption. The first go-round is referred to as the economics go-round. The meeting participants describe their views on current economic conditions and their outlook for future economic conditions. The presidents' remarks will typically include references to their own local economies, as well as the national and global situation..As part of my contributions to the economics go-round in the last couple of meetings, I discussed my outlook for GDP, inflation, and unemployment. In terms of GDP, I believe that a modest recovery is under way and is likely to continue. In terms of inflation, I expect a slight but welcome uptick over the next 18 months. Finally, in terms of unemployment, I see ongoing problems in labor markets..…After the economics go-round, the FOMC meeting then transitions to its second phase, the policy go-round. Again, the meeting participants have a chance to speak in turn about what they perceive to be the appropriate policy choices for the committee. We all are committed to achieving the Fed's dual mandate to attain both price stability and maximum employment. The former objective is generally understood as keeping inflation in a tight range around 2 percent. The second part of the mandate is much more of a moving target. Employment is shaped by many determinants beyond the Fed's control: demographics, social custom, taxes, and so on. The Fed's job is to keep employment as high as possible, given these other factors..…My discussion may have struck you as somewhat technical, and this is no accident. The FOMC meeting participants are a group of unabashed technocrats, seeking to solve an unabashedly technical problem: How do we manage monetary policy so as to ensure lower unemployment and maintain inflation at an appropriate rate? We certainly disagree with one another on occasion. But our disagreements ultimately stem from different assessments of the complicated economic situation and not from political differences..I believe that the apolitical nature of the FOMC's work hinges critically on another aspect of central bank structure, and that has to do with the Federal Reserve's relationship with the U.S. Congress. On the one hand, the Federal Reserve is a creation of Congress. It has the power to amend the Fed's responsibilities, as the recent financial reform legislation certainly attests. The Senate approves the presidential appointments to the Board of Governors. Both chambers receive regular reports from the Board of Governors on the conduct of monetary policy, financial supervision, and the payments system. In addition, the Federal Reserve undergoes regular audits of its finances and various operations.On the other hand, Congress has intentionally removed itself from the direct conduct of monetary policy by granting the Federal Reserve the independence to perform this function on its own. In effect, Congress has said that it does not want monetary policy unduly affected by political considerations. This independence is not only a hallmark of this country's central bank, but is also a characteristic of developed economies worldwide.