The Federal Reserve: Open Market Operation

The Federal Reserve is that American monetary authority responsible with controlling the money supply, inflation target, employment, interest rates among other functions , and disposes of a range of tools to do so with one of them being the most used and perhaps the most useful, too : Open Market Operation.

In fact, among its many methods ( Discount rate, Reserve Requirements and the like) to serve its role, the Fed most often uses Open Market Operation, which is the buying and selling of securities ( bonds, stocks, and others) because this tool is most effective and efficient at helping to manage short-term interest rates at which banks and other intermediaries borrow money overnight from one another. This rate, which serves to both maintaining

One way to do so is to buy securities. In effect, when the Fed buys securities from banks or other intermediaries, the market money supply increases, which, in turn, puts downward pressure on interest rates allowing more fluidity into the economy as making loans becomes less costly. When the economy in is such a state ( lower interest rates), credit becomes less costly and more attractive. Hence, as predicted by the supply and demand principle, the increase in the money supply necessarily drives the price of money ( its interest rate) down inducing more borrowings and investment to take place to ultimately and positively impact the economy (Ibid. n. d.). Expansionary or contractionary monetary policy stem from the Open Market Operation and are used by the Federal Reserve under the Federal Open Market Committee’s recommendation about the level of the overall economy ( level of employment, interest rate, inflation and the like. When the economy is overheated, that is when inflation way exceeds target level, the Fed will began to buy securities ( contractionary monetary policy) as a means to reduce the money supply and put Upward pressure on securities prices reducing interest rate. Likewise, If there is a recession, the Fed will sell securities ( contractionary monetary policy) as a means to add liquidity into

If the Federal Reserve purchases $ 10 billion worth of foreign currency in exchange for deposit accounts at the Federal Reserve the Fed’s balance sheet would show a decrease in reserve of $ 10 billion, which will the Fed’s foreign currency deposit account by $ 10 billion , and an increase in Deposits of $ 10 billion worth, which will increase total liabilities by $ 10 billion . The Fed’s balance sheet would show net worth being augmented by $ 10 billion on the liability side along an even amount in decrease in reserve, but it would also