What Is The Federal Open Market Committee?

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Monetary policy in the US is shaped by many factors and is clearly of great significance to the real estate sector and, particularly, investors in the multi-family and/or BTR-SFR syndicated sectors. Such policy can affect interest rates and, thereby, the cost of borrowing for real estate transactions or the expected rates of investment return sought by investors taking into account risks, taxation and depreciation and influence cap rate movements, for example.

Policies set by The Federal Open Market Committee (FOMC), therefore, plays a leading pivotal, yet indirect, role in the outlook for multifamily estate so this week we will take a look at the Committee and its key functions.

What is The Federal Open Market Committee?

The FOMC is the monetary policy-making body of the Federal Reserve System, responsible for setting the nation’s monetary policy. It is composed of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents, who serve on a rotating basis.

The FOMC meets eight times per year to review economic and financial conditions, assess risks to the economy, and set monetary policy. The primary goal of the FOMC is to promote maximum employment, stable prices, and moderate long-term interest rates.

What are the main functions of The Federal Open Market Committee?

The FOMC has three main functions:

• Setting monetary policy;
• Implementing monetary policy; and
• Overseeing the Federal Reserve system’s operations.

Setting monetary policy

The FOMC’s primary function is to set monetary policy, which it does by setting the target for the Federal Funds Rate (FFR). The FFR is the interest rate that banks charge each other for overnight loans of their reserves held at the Federal Reserve. By setting a target for the FFR, the FOMC can influence other interest rates throughout the economy, such as the prime rate, mortgage rates and corporate bond rates.

The FOMC sets the target for the Federal Funds Rate based on its assessment of the current and future economic and financial conditions. The FOMC uses a variety of economic indicators, such as gross domestic product (GDP), inflation and unemployment rate, to determine the appropriate level of the FFR. If the FOMC believes that the economy is growing too fast and inflation is becoming a concern, it may raise the target for the Federal Funds Rate to slow down economic growth and keep inflation in check.

Conversely, if the FOMC believes that the economy is slowing down too much and unemployment is becoming a concern, it may lower the target for the FFR to stimulate economic growth and create jobs.

Implementing monetary policy

Once the FOMC has set the target for the Federal Funds Rate, it uses a variety of tools to implement monetary policy and achieve its goals. The primary tool used by the FOMC is open market operations, which involves buying and selling US Treasury securities in the open market. When the Federal Reserve buys Treasury securities, it increases the amount of reserves in the banking system, which puts downward pressure on the FFR. Conversely, when the Federal Reserve sells Treasury securities, it decreases the amount of reserves in the banking system, which puts upward pressure on the Rate.

In addition to open market operations, the FOMC has a variety of other tools at its disposal to implement monetary policy, such as adjusting the discount rate (the interest rate that the Federal Reserve charges banks for loans), changing reserve requirements (the amount of money that banks are required to hold in reserve), and providing liquidity to the banking system through the discount window or other lending facilities. It also works with the US Treasury’s fiscal agent on matters relating to taxation and depreciation allowances.

Overseeing the Federal Reserve system’s operations

In addition to setting monetary policy and implementing it, the FOMC also oversees the operations of the Federal Reserve system. This includes overseeing the operations of the Federal Reserve Banks, which provide banking services to the US Treasury, other banks, and the general public. The FOMC also supervises and regulates banks and other financial institutions to ensure the safety and soundness of the financial system.

The FOMC also plays a key role in communicating with the public and financial markets about its policies and decisions. After each FOMC meeting, the Committee issues a statement that explains its decision on the Federal Funds Rate target and provides an assessment of the current economic and financial conditions. The FOMC also holds regular press conferences to provide additional information and answer questions from journalists and other interested parties.

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CPI Capital carefully follows any news about the FOMC and its policies given that it plays a critical role in setting and implementing monetary policy in the United States. Such policies, in turn, can influence a wide variety of key issues as they relate to multifamily and/or BTR-SFR syndicated real estate investment: the cost of debt/financing, expected occupancy of the multifamily units and the expected returns for our passive investor, to name but a few.

Our financial team at CPI Capital constantly monitors any change or forecast changes in the dynamics of the real estate markets as a result of the FOMC narrative or sentiment, per- or post any committee meeting.

Yours sincerely,
August Biniaz
CIO, Co-Founder CPI Capital