Key Takeaways
In closed-door meetings of the Federal Open Market Committee (FOMC), policymakers debate the direction of the benchmark interest rate. They carefully word their statements and take pains to craft their messages.
The committee rarely goes against the chairman's wishes, but individual members can dissent. The FOMC meets this week for the first time this year. Market participants expect no change to the benchmark interest rate, but will be watching to see what the Fed says about the possibility of future rate cuts.
You may never get to attend the Federal Open Market Committee (FOMC) meetings where the fate of the economy is decided, but the decisions made there will certainly affect your finances.
The committee meets eight times a year for two days to set the Federal Reserve's benchmark, the federal funds rate, one of the most important numbers in the entire economy. This rate not only influences the interest rates offered on all types of credit, but is also used as a tool to keep inflation in check.
But unlike many government deliberations, the meeting where this crucial tax rate is decided takes place behind closed doors, with minutes not made public until several weeks later, and full minutes only made public five years later.
Federal Reserve policymakers will meet on Tuesday and Wednesday this week for the first time in 2024. Market participants expect the FOMC to keep interest rates on hold this week, as it has done at the past two meetings, but they will be watching to see what Chairman Jerome Powell and other members of the committee say about a possible rate cut at subsequent meetings.
To learn more about how this crucial decision is made, let me take you to the Federal Reserve's Martinville headquarters, where the FOMC meets.
We interviewed former commissioners and looked at meeting minutes and transcripts to find out what it's like to sit around a big square table and make open market decisions. We'll hear from two former commissioners, James Bullard and Jeffrey Rucker.
Bullard served as president of the Federal Reserve Bank of St. Louis from 2008 until August 2023, when he retired to become dean of the Daniels School of Business at Purdue University. Rucker served as president of the Federal Reserve Bank of Richmond from 2004 to 2017 and is currently a professor of economics at the Virginia Commonwealth University Graduate School of Business.
Making decisions before the meeting is inevitable
The Federal Reserve has a dual mandate to maintain maximum employment and stable prices, but these two goals are sometimes in conflict: an overly active economy and excessive employment can lead to undesirable levels of inflation.
Through its monetary policy decisions, the FOMC plays a central role in either promoting economic growth through low interest rates (which can stimulate inflation) or suppressing inflation through high interest rates (which can stagnate the economy). The FOMC is now at a tipping point. After nearly two years of raising and keeping interest rates high to suppress inflation, the Fed appears poised to start cutting interest rates soon.
The main decision the FOMC makes when it meets is whether to be “hawkish” or “dovish” in setting the benchmark interest rate. A hawkish policy favors keeping interest rates high to keep price pressures down, while a dovish policy emphasizes low interest rates to support growth and employment.
A week before the meeting, FOMC members are presented with three options for what rate they will set and what statement they will issue along with a statement prepared by the chairman and his staff, according to interviews with former members and publicly available minutes.
Alternative B is the default choice and represents what the chairman wants. Alternative A would be more dovish and would set a lower interest rate or potentially keep the same but make a statement indicating a tendency to lower interest rates or slow interest rate increases in the future.
Option C would set a higher interest rate or a more hawkish tone in the statement.
The meetings are highly structured — each participant is given a chance to give their assessment of the economy, for example — and Bullard said the process can take more than an hour and a half, even if the informal time limit of about 10 minutes is adhered to.
At the end of the meeting, after much deliberation, the committee members vote. Almost every time, they choose option B. Only once during Mr. Lacker's tenure did they choose a different option. Mr. Lacker's tenure overlapped with those of former chairs Ben Bernanke and Janet Yellen, but ended before Mr. Powell became chair in 2018.
“We sometimes joke that we don't really need to do much because we know option B is going to be the answer,” said Bullard, who served on the FOMC under Bernanke, Yellen and Powell. “But there's a lot of methodology in this madness.”
The message was carefully crafted
While the policy rate is usually fixed, the statement is frequently revised, and members may extract phrases or language from other statements to incorporate into “Alternative B.” Sometimes, during periods when the Fed is keeping rates on hold, the result is a statement that is nearly identical to the last one, with perhaps a word or two changed.
At any given Federal Reserve meeting, interest rate policy is typically predictable and well known to the market: The committee bases its decisions on publicly available economic data, and FOMC members frequently announce in public their thoughts on appropriate interest rate policy.
“Debates about monetary policy are ongoing around the world, 24 hours a day, 365 days a year,” Bullard said. “The meetings are certainly important, but they are only a snapshot of the ongoing discussions.”
The discussions haven't always been public: The FOMC began explaining its interest-rate decisions and compiling meeting minutes in 1994 under then-chair Alan Greenspan, and the tradition of the Fed chairman holding a news conference after meetings began in 2011, when Bernanke was chairman.
Until the 1990s, central bank leaders were notoriously secretive, believing monetary policy was more effective when it surprised markets, but during Greenspan's tenure, which lasted from 1987 to 2006, he increasingly came to believe in greater transparency.
There is little disagreement on the formation
Occasionally, some members may vote against the consensus, and their dissent and reasons will be documented in a publicly available policy statement.
For example, Mr. Lacker dissented at all eight meetings in 2012, when Fed policy was very dovish and interest rates were kept near zero. Mr. Lacker said the dissenting voices were more about making a statement than defying the chairman's wishes, and were playing a long game trying to influence the committee's thinking.
“The speaker cannot lose a majority vote. That's not going to happen,” he said.
Disagreements are civil and never heated, said Lacker, one of the Fed's most frequent dissenters.
“I've never experienced any disrespect or hostility,” he said.
The last time committee members voted against it was in June 2022, when the Fed was in the midst of a campaign to sharply raise interest rates to fight inflation. At that meeting, the committee voted to raise rates by three-quarters of a percentage point, but Kansas City Fed President Esther George wanted a more gradual increase of just half a percentage point.
Correction, Jan. 29, 2024 — This article has been corrected to state which FOMC members voted in favor of lowering interest rates at the June 2022 meeting. The yes vote was Esther George.