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open market operations
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open market operations


  most frequently used tool of monetary policy in which the Federal Reserve buys or sells government securities
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open market operations open market operation
Notes:
The Federal Open Market Committee (FOMC) is the part of the Federal Reserve System responsible for adjusting the money supply through open market operations. When people refer to the committee or the system, they often just say "the Fed."

The government borrows money by selling securities. That is a Congressional decision made without participation of the Fed. Once those bonds are issued, however, the Fed can adjust the money supply by buying or selling them.

If the FOMC wants to increase the money supply, they purchase government securities that have already been issued. If, for example, an insurance company sells government bonds to the Fed, the Fed writes them a check. When the insurance company deposits the check in their bank they seldom ask for currency in return. When asked for currency the Fed will print it, but generally it just makes a bookkeeping entry that the bank has increased reserves with the Fed. That, in turn, permits the bank to lend more money to others.

If the FOMC wants to decrease the money supply, the process is reversed. For example, the Fed sells bonds from an insurance company. The insurance company writes a check to the Fed which decreases the insurance company’s bank’s reserves with the Fed. Accordingly, that bank cannot loan as much money to its clients.

The Fed uses monetary targets, such as interest rates, inflation, or exchange rates to determine its open market operations.

Although open market operations are the most important of the Fed’s monetary tools, it has other tools such as discount-rate policy and legal reserve ratio requirements.
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Associated words [difficulty]:   open market operations
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Most commonly used in these subjects:   Public Policy & Politics, Business, Personal Finance
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