In 1997, Time magazine profiled central banker Alan Greenspan, along with Treasury Secretary Robert Rubin and then Deputy Secretary of the Treasury Larry Summers, under the title “The Committee To Save The World”. 

While such a description may be a slight exaggeration, the role the Treasury and the Federal Reserve play in the American economy are quite important, and much more so when something in the monetary system goes a bit haywire. 

The Federal Open Market Committee is meeting this Tuesday and Wednesday, June 14-15th. The FOMC, the Fed’s chief body for monetary policy, meets 8 times a year to discuss: 

• Financial markets and the movement of international currencies
• Economic and financial forecasts
• Assessments of recent developments by Reserve Bank presidents

The committee examines these developments in light of the dual mandate given to them by the U.S. Congress, which includes: 

• Maximum employment
• Price stability 

With inflation reaching the highest levels in 4 decades, these meetings, and the actions taken in them, hold great significance for the United States and the effects of their decisions will reverberate globally. With unemployment at record lows, price stability is their main concern. 

The Federal Reserve’s main tool to reduce inflation is through increasing interest rates. They can do this by raising the Federal Reserve discount rate, or through reducing the quantity of bonds on the Federal Reserve Bank’s balance sheet. Higher interest rates have the effect of slowing money creation and economic activity, which in turn reduce the rate of inflation.

The high rate of inflation means that the decision to tighten monetary policy is a foregone conclusion. The only decisions under debate this week will be 1) how high to hike interest rates and 2) the appropriate quantity of bonds to remove from the Fed balance sheet.

Ideally the Federal Reserve would be able to tighten monetary policy without throwing the U.S. into a recession; however, this has proved challenging in the past, particularly in an environment with exceptionally high inflation and slowing economic growth. 

If they overshoot, the Federal Reserve may be refocusing on that maximum employment number 12 months from now.