To those on the outside, the activities of the nation’s Federal Reserve Bank can seem almost inscrutable. The Fed is actually a nationwide network of quasi-public banks and their members, with the leaders of each serving on a range of influential committees. Through its policies and lending activities, the Federal Reserve Bank guides the nation’s monetary activity, steering it toward what its leaders believe will be the norms most productive for the broader economy.
Of all the Federal Reserve Bank’s several committees, the Open Market Committee is certainly the most influential. The Open Market Committee is tasked with setting policies that govern the way the Fed interacts with the private markets that make the national and international economies hum. The policies that the Open Market Committee lays down therefore serve as a bridge between the Fed’s internal resolutions and the real, everyday public activities that contribute directly to economic well-being for average people.
What happens at the average FOMC meeting therefore often revolves around questions related to the broader economy. The Federal Reserve Bank never acts in a vacuum, always seeking to make sure that its decrees and actions will contribute to economic vitality for the United States. The Open Market Committee is most intimately tied to the broader economic situation, though, so its members have to refer regularly to what is going on in the world around them as they deliberate.
The Open Market Committee has a number of tools for influencing the domestic and global economies, but one stands out above the others. That most powerful of cudgels is the so-called overnight lending rate, a toll exacted every time banks engage in the briefest and most common of borrowing from one another and the Fed.
Because overnight lending is such a crucial lubricator of the financial system, the rate set by the Fed tends to have far-reaching effects. A slight bump in the overnight lending rate, for example, directly influences the rate that banks charge for lending to prime-qualified businesses. An increase or drop in that prime lending rate directly affects the rates that consumers pay on their credit card balances and other loans, making the Open Market Committee’s actions especially momentous.