Open Market Operations
What Is Open Market Operations?
Open market operations are the Federal Reserve's purchases and sales of securities - mainly U.S. Treasury securities - used to implement the FOMC's target for the federal funds rate. When the FOMC announces a target, open market operations are one of the primary tools that actually put that target into effect, alongside administered rates such as the interest the Fed pays on bank reserves. Buying securities adds reserves to the banking system and tends to push short-term rates down, while selling securities drains reserves and pushes rates up. These operations are carried out by the Federal Reserve Bank of New York on behalf of the whole committee.
Why It Matters
Open market operations are how the Fed turns a policy announcement into a real market rate. The committee can vote to set a target, but without a mechanism to influence the supply of reserves the target would be just words. During large-scale asset purchase programs like quantitative easing, the Fed used a vastly expanded version of these operations, buying trillions in Treasuries and mortgage-backed securities to push down longer-term rates once the federal funds rate was already near zero. In the AP Macroeconomics framework, open market purchases are the classic expansionary tool and open market sales the contractionary one, making these operations central to understanding how central banks move the economy.