Q:

What are the open market operations of the FED?

A:

Quick Answer

Open market operations of the U.S. Federal Reserve system are the sale and purchase of securities in the open market. These transactions take place at the Trading Desk of the Federal Reserve Bank of New York. The goal of open market operations is to expand or contract the amount of money in the banking system.

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Full Answer

The sale of securities by the Federal Reserve's OMO restricts the amount of money available to banks, whereas the purchase of securities puts more liquidity in the financial system. OMO typically influence short-term interest rates to accomplish policy objectives.

OMO fall into two categories: permanent and temporary. Permanent OMO typically deals with long-term goals. Temporary OMO hit the Trading Desk to deal with transitory market issues, such as a recession. The Federal Reserve uses OMO to adjust the federal funds rate, which is the rate banks use to borrow money from each other.

One extremely large OMO occurred from December 2008 to August 2010, when the Federal Reserve purchased $175 billion in direct obligations from several federal mortgage agencies. The Federal Reserve then purchased more than $1.25 trillion in mortgage-backed securities from January 2009 to August 2010. This was in direct response to the recession of 2008, in which the American housing market collapsed due to the failure of subprime mortgages.

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