Open Market Operations
Candlefocus EditorOpen market operations is a method which involves the central bank buying and selling securities on the open market. When the Federal Reserve System buys securities, money is added to the system, rates are lowered, and loans become easier to obtain, which often encourages economic activity. On the other hand, when the Fed sells securities, money is removed from the system, rates are increased, and loans become more expensive, which tends to dampen economic activity.
The federal funds rate, which is the interest rate that banks charge other banks for short-term loans, serves as the key target rate for open market operations. The interest rate is the prime mover of how the Federal Reserve System chooses to use open market operations, and the Fed sets rates through purchases and sales of government bonds.
Through open market operations, the Federal Reserve System is able to manipulate the amount of money in the system in order to achieve their economic goals, such as reducing inflation or encouraging economic growth. By controlling the price and supply of money and credit, the Fed can affect the economic operations of the nation and help to ensure policies regarding growth and stability.
In conclusion, open market operations are an essential tool used by the Federal Reserve System to manage the money supply, affect the availability of money and credit, and to create policies to promote economic growth and stability in the United States. By manipulating the federal funds rate, they are able to buy or sell securities in the open market to meet their economic goals.