What Are Federal Reserve Open Market Operations?

Executive Summary

• The term open market operations are often discussed by the Fed.
• Open market operations are transfers used by the Fed to apply its policy.

Introduction

An open market operations by the Fed is when it buys or sells securities. This process happens between the Fed and the commercial banks. This process is performed in secret.

This is explained in the following quotation.

“The normal operating procedure is for the Fed to offset factors that cause reserve imbalances, called operating factors, with open market operations. Operating factors include any transfers between commercial banks and the Fed, and other items that effect reserve balance including changes in uncleared checks, known as “float”, and changes in cash in circulation. The sale of newly issued government securities by the Treasury affects the private sector in exactly the same way as the sale of securities by the Fed from its portfolio of existing government securities. In either case, funds held by the private sector are transferred to the Fed, the government securities are credited to a member bank’s account, and a reserve drain equal to the proceeds of the securities sale results.”

Source: Warren Mosler

http://moslereconomics.com/wp-content/uploads/2019/02/Full-Employment-AND-Price-Stability.pdf