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Posted By Admin @ Mar 02, 2022

Tittle: Essay on Open Market Operations by Federal Reserve

Type: Essay

Subject: Marketing

APA

By ABC

Date:

 It is important to understand what “open market operations” are and how it works with regards to the Federal Reserve. The open market operations (OMOs) are a system, where securities are bought or sold from other banks by the Federal Reserve. These securities are either mortgage-backed or treasury notes. It is important to know why Federal Reserve involves in such kind of activity, and there is one primary reason to do so; it helps Federal Reserve to raise as well as lower the level of interest rates. For instance, when Federal Reserve wants to raise the interest rate, then securities are sold to the member banks. This policy is given a particular name, which is called a contractionary monetary policy. The main purpose of doing so is to make inflation a bit slow so that economic growth can be stabilized. However, when the purpose is to lower the level of interest rates, the securities are bought by Federal Reserve from the banks. When these securities are purchased as OMOs, this policy is named as expansionary monetary policy. The policy is adopted for stimulation of economic growth so that the unemployment rate can be lowered (AMADEO, 2019)

 The Federal Reserve is the central bank of the United States, so they have to involve in different activities to handle their monetary policy. OMOs are one of the methods to manage central monetary policy so that the Federal Reserve can have more control on things. It is important to mention here that the Federal Reserve serves two kinds of purposes with the help of OMOs, and these purposes can be short term or long term. These purposes are served with the following types of policies:

• Permanent: The Federal Reserve may sale or even purchases securities with an outright approach and the purpose of this sale is purchase is associated with the System Open Market Account (SOMA), which is one of the portfolios of the Federal Reserve. The Federal Reserve has to deal with such OMOs so that they can manage their balance sheet on a long term basis. If a financial crisis is about to happen, or when a financial crisis has gone, the role of OMOs is crucial in both situations. These permanent OMOs are useful for the Federal Reserve as they can adjust holdings of their securities so that downward and long term pressure is put on the interest rate, as well as it is done to get more accommodative financial conditions. The policies of the FOMC are being applied with the current permanent OMOs (FEDERAL RESERVE SYSTEM, 2019)

• Temporary OMOs: It is important to know that there are various transitory reserve needs, which are handled with the help of temporary OMOs. Two kinds of agreements are made with these temporary OMOs; first is called reverse repurchase agreements and the second is called repurchase agreements. In repurchase agreements, security is bought by the trading desk and an agreement is made that security will be resold in the future. The repurchase agreement is actually a collateralized loan or a method to get economic equivalent by the Federal Reserve. In reverse repurchase agreements, security is sold by the trading desk, and an agreement is made that this particular security will be repurchased by the Federal Reserve in the future. FOMC has set a target range for the federal funds rate, and the Federal Reserve is able to handle that funds rate with the help of reverse repurchase agreements (FEDERAL RESERVE SYSTEM, 2019)

 After looking at both the Permanent and Temporary OMOs, it is essential to understand that both OMOs are critical for the Federal Reserve on a short and long term basis because they are extremely helpful in managing the balance sheet. It is crucial for the Federal Reserve to come up with some policies so that normalization of the monetary policy is achieved accordingly, and agreements made under the permanent and temporary OMOs are vital to keeping things on the right track.