What are Open Market Operations?
Updated: May 14, 2012 at 5:10 AM
Open Market Operations Definition. Open Market Operations are the direct actions taken by a central bank to implement its monetary policy objectives for the size of the national money supply by buying and selling government securities or overnight repo agreements, thereby adjusting bank reserve accounts with the central bank. The process of buying or selling government bonds to banks is a way to stabilize the money supply by either adding or removing money from the banking system. For example, if inflation needs to be controlled, the Fed will sell securities to banks, thereby reducing their ability to lend and contracting the availability of money. Conversely, the Fed will buy back bonds to increase a bank's ability to loan funds when economic activity requires stimulation. The Fed is able to create or destroy money by modifying the reserve accounts of banks with the central bank. The Fed has used open market operations in this manner since the 1920s, by means of the Open Market Desk at the Federal Reserve Bank of New York, under the direction of the Federal Open Market Committee. The use of open market operations is considered to be the most important and flexible tool of monetary policy available for the Fed.
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