The FOMC, monetary policy and inflation
The Federal Reserve (or the Fed) is charged with maintaining a careful watch over the US economy and deciding on the monetary policy that will help our economy grow at a healthy rate. Generally, monetary policy refers to the actions taken by a central bank, like the Federal Reserve, to influence a country's money supply or interest rates. At the Fed, the responsibility for making monetary policy lies with the Federal Open Market Committee (the FOMC), one of the three divisions of the Federal Reserve System.

The goal of the FOMC is to create an economic environment that stimulates economic growth, full employment and stable prices. An important factor underlying this policy is maintaining a low rate of inflation. Usually calculated as a percentage, inflation is a sustained increase in prices over a period of time. Although prices will rise, a high rate of inflation has a negative impact on the economy. So the Fed strives to keep both the economy growing and the inflation rate low.

When inflation is high,

• prices for goods and services may rise faster than wages, so consumers may not be able to buy as much as they could previously
• people are discouraged from saving, because interest rates on savings accounts may not rise as fast as inflation
• businesses will raise prices of their products and services in order to cover the higher production costs, however, it may be harder for companies to anticipate the demand for their products or services at these higher prices

The Consumer Price Index (CPI) is one measure of inflation. Calculated by the Bureau of Labor Statistics, the CPI is the ratio of the current value of a basket of goods and services to the value of the same basket of goods services in a previous year. For current CPI figures, visit the Bureau's website. Use the Bureau's inflation calculator to see how much inflation has affected the price of goods and services over the years. 

Interest rates - to cut or not to cut…
Typically, eight times a year, the FOMC reviews the state of the US economy and decides whether the economy is growing too fast or too slow. When determining monetary policy, the FOMC focuses on the growth of money (cash in circulation plus the amounts people and businesses have in bank accounts) and credit (the amounts that banks and other lenders can lend). The FOMC can affect changes in this growth by changing the level of the federal funds rate, which is the interest rate commercial banks charge amongst themselves for overnight loans. If the economy is growing too fast, the FOMC might increase the federal funds rate. If the economy is not growing fast enough, the FOMC might cut the federal funds rate. The FOMC may also decide to leave the federal funds rate unchanged. A change in the federal funds rate generally affects other short-term and long-term interest rates. These rates tend to move in the same direction as the federal funds rate.

When interest rates are low, people tend to borrow money to buy houses, cars or other high-priced items. Companies borrow money to buy new equipment or to expand their businesses. This demand for loans generally increases the supply of money and credit. High interest rates usually have the reverse effect. People and companies may decide to save more money. They may also delay large purchases until interest rates are lower. This takes money out of circulation and lowers the demand for credit.

The other parts of the Federal Reserve System
There are two other divisions of the Federal Reserve System: the Board of Governors and the Federal Reserve Banks. Also known as the Federal Reserve Board, the Board of Governors writes policies that regulate US banks and leads committees that study economic issues. All seven governors are voting members of the FOMC. In addition, the Federal Reserve Board oversees the activities of the 12 regional Federal Reserve banks, including approving the appointments of the Reserve bank presidents.

When Congress created the Federal Reserve System, it wanted to ensure that this central banking system operated on both a national and regional level. The country was divided into 12 districts and each district has a Federal Reserve Bank located in one of its major cities: Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco. There are more districts in the east because when the system was created, US population and business activity was concentrated more in the east than it is today.

Each Federal Reserve Bank gathers and analyzes economic data concerning its region. This research is presented and discussed by the FOMC as part of its review of the US economy. Although all Reserve bank presidents attend FOMC meetings, only five are voting members. The president is of Federal Reserve Bank of New York is a permanent voting member; the other Reserve Bank presidents are voting members on a rotating basis.

Reserve banks also supervise the commercial banks within their regions and provide them with some key services that help prevent disruption in the banking industry. One of those services is to provide coin and currency to commercial banks. For example, many companies pay their employees on Friday. A Federal Reserve bank will make sure that it has enough coin and currency in its vaults to distribute to commercial banks, when requested. That way people can cash their paychecks without worrying that their bank is going to run out of money. In addition, Federal Reserve banks also provide electronic funds transfer services, like direct deposit and electronic bill payment, and process checks. Read more about the processing of checks on the Fed's education website.

ADDITIONAL RESOURCES
For more information about the Fed and for links to the education sites of the Federal Reserve Banks, start your visit here at the Federal Reserve's education portal.

The Bureau of Labor Statistics also complies other data about the jobs and US economy, including monthly unemployment rate, information about jobs, wages and the US workforce. Want to know more.

SOURCES
Federal Reserve Board, Federal Reserve Bank of New York, Federal Reserve Bank of St Louis, US Bureau of Labor Statistics