The term open market operations refers to the purchase and sale of government securities in order to increase or decrease the money supply. Open market operations are one of the three tools the Federal Reserve can use to reach or maintain the objectives of its monetary policy.
Also known as OMOs, open market operations involve the purchase and sale of government securities by a central bank. OMO is one of the three tools the Federal Reserve can use to achieve its monetary policy objectives. Generally, the purchase of securities (primarily Treasury bonds) injects money into the banking system, thereby stimulating growth in the economy. Conversely, selling securities lowers the money supply, thereby slowing down an overheating economy.
Open market operations are subdivided into two tactics:
The purchase and sale of government securities provides the Federal Reserve with a mechanism to control the reserve balances held by banks, which will lead to an increase or decrease in short-term interest rates.