OMOs — Open Market Operations

Содержание
  1. What are open market operations (OMOs)? Definition and meaning
  2. Open market operations – a tool
  3. Two types of open market operations
  4. OMOs – Advanced and emerging economies
  5. Open market operations — D3
  6. Timeliness
  7. Statistics release calendar
  8. Dissemination of terms and conditions under which official statistics are produced, including confidentiality of individual responses
  9. Provision of information about revisions and advance notice of major changes in methodology
  10. Dissemination of documentation on methodology and sources used in preparing statistics
  11. Additional notes
  12. Electronic Media
  13. Interest bearing securities
  14. Types of Government securities currently on issue are:
  15. Reserve Bank bills
  16. Commercial paper
  17. Corporate bonds
  18. Domestic corporate bonds
  19. Non-domestic corporate bonds
  20. Registered certificates of deposits (RCDs)
  21. Repurchases and reverse repurchases
  22. Asset-backed securities
  23. Open market operations
  24. Term Auction facility
  25. Reserve Bank bill tender
  26. Large Scale Asset Purchase programme
  27. Corporate Open Market Operation
  28. Total volume/ amount offered
  29. Volume offered per maturity
  30. Volume bid/ Total bids submitted
  31. Total amount transacted/ Total successful bids
  32. Range of bids received
  33. Range of successful bids
  34. Weighted average successful bids
  35. Date held
  36. Range of yields on unsuccessful bids
  37. Weighted average yield of unsuccessful bids
  38. General notes
  39. Open Market Operations (Examples) | How does it works?
  40. Steps of Open Market Operations
  41. #1 – Buying Government Bonds from Banks
  42. #2 – Selling Government Bonds to Banks
  43. # 1 – Permanent Open Market Operations
  44. #2 – Temporary Open Market Operations
  45. Open Market Operations Examples
  46. #1 – Inflation and Interest Rate Targeting
  47. #2 – Money Supply Targeting
  48. Conclusion
  49. Recommended Articles
  50. Open Market Operations: Explained with Examples
  51. First, Let’s Understand the Federal Funds Rate
  52. Now, How Open Market Operations Work
  53. Tapping the accelerator: expansionary monetary policy
  54. Tapping the brakes: contractionary monetary policy
  55. Monetary Policy in the Post-Recession Economy
  56. A Quick Recap
  57. Additional Resources
  58. Board of Governors of the Federal Reserve System
  59. Monetary Policy Normalization
  60. Large-Scale Asset Purchase Programs
  61. Maturity Extension Program
  62. Single-Tranche Term Repurchase Agreements
  63. Securities Lending

What are open market operations (OMOs)? Definition and meaning

OMOs - Open Market Operations

Open market operations, also known as OMOs, refers to the buying and selling of securities in the open market by a country’s central bank.

OMOs are a key tool used by the US Federal Reserve, the Bank of England, the European Central Bank, and other central banks across the world in the implementation of monetary policy.

These central bank interventions manipulate liquidity levels. When they purchase securities they inject liquidity into the country’s economy, when they sell them, they soak up the liquidity.

The aim in the short-term of open market operations in the United States is specified by FOMC (Federal Open Market Committee).

In the US, OMOs are performed by the Trading Desk at the Federal Reserve bank of New York. The Federal Reserve (Fed) is only authorized to buy and sell a limited range of securities.

The central banks of most advanced economies are not allowed to lend money without requiring suitable assets as collateral. Therefore, central banks describe which assets may be bought and sold in open market operations.

Technically, the country’s central bank lends a certain amount of money and simultaneously takes the same amount of an eligible asset which the borrowing commercial bank supplies.

Open Market Operations occur when the central bank purchases or sells securities in the open market – it is the main method for implementing monetary policy. They either pump money into the economy to kick-start it, or suck money out to reduce inflation.

OMOs may also directly target money supply growth – however this is extremely rare. The vast majority of central banks directly target interest rates, which are adjusted to meet annual inflation targets.

The Financial Time’s dictionary of terms says to define open market operations:

“Central bank intervention in the money markets, where it buys and sells securities in order to control the money supply and the level of interest rates.”

The Federal Open Market Committee (FOMC), part of the US Federal Reserve, has traditionally sold and bought securities, mainly US Treasury securities and federal agency securities, either through repurchase agreements or outright purchases, in the open market through primary dealers

. According to the Office of the Inspector General of the Federal Reserve: “By adjusting the level of reserve balances, the Federal Reserve influences the federal funds rate as shown by the diagram above.” (Image: adapted from oig.federalreserve.gov)

According to the Reserve Bank of Australia, the country’s central bank:

“Open market operations are conducted almost every business day at 9.30 am and occasionally at 5.10 pm (AEST/AEDT). From time to time, the Reserve Bank may decide not to conduct open market operations on a given day if it judges that the banking system has the appropriate amount of liquidity.”

Open market operations – a tool

Open market operations are one of three basic tools that central banks use to reach their monetary policy goals. The other two are: 1. Changing the terms and conditions for borrowing at the discount window. 2. Altering the required reserve requirement ratios.

The execution of open market operations in the ‘open market’ – often called the secondary market for securities purchases – is a central bank’s most flexible means of seeing through its objectives.

According to the Federal Reserve Bank of New York:

“By adjusting the level of reserve balances in the banking system through open market operations, the Fed can offset or support permanent, seasonal or cyclical shifts in the supply of reserve balances and thereby affect short-term interest rates and by extension other interest rates.”

The European Central Bank says the following regarding open market operations: “It is an important tool for managing interest rates, market liquidity, and signaling the next policy movement.” (Image: Adapted from image.slidesharecdn.com)

Two types of open market operations

In the US, open market operations are divided into two types:

Permanent: – these involve the outright buying or selling of securities for SOMA (System Open Market Account), the Fed’s portfolio.

Permanent OMO’s are traditionally used to accommodate long-term factors driving the expansion of the Fed’s balance sheet – primarily, the trend growth in the amount of money in circulation.

When the global financial crisis struck, and for a period afterwards, open market operations were used to adjust the Fed’s holdings in securities, the aim being to put downward pressure on longer-term interest rates, as well as making financial conditions more accommodative.

Temporary: these OMOs are mostly used to deal with reserve needs that the central bank deems to be transitory in nature. These operations are either Repos (repurchase agreements) or RRPs (reverse purchase agreements or reverse repos).

Under a reverse repo, the agreement is that the central bank sells a security and repurchases it at a later date. A reverse repo is the economic equivalent of collateralized borrowing by the central bank.

The US Federal Reserve has been conducting open market operations since the 1920s through the Open Market Desk at the  Federal Reserve Bank of New York.

The European Central Bank (ECB) says that the Eurosystem’s regular open market operations consist of:

Main Refinancing Operations: also known as MROs. These are one-week liquidity-providing operations in euros. They serve to steer interest rates over the short term, to signal the monetary policy stance in the euro zone, and to manage the liquidity situation.

Longer-Term Refinancing Operations: also known as LTROs. These are three-month liquidity-providing operations in euros. They serve to provide additional financing to the financial sector over the long term.

In an article published online by the International Monetary Fund – Transformations to Open Market Operations – Stephen H. Axilrod writes:

“By buying or selling bonds, bills, and other financial instruments in the open market, a central bank can expand or contract the amount of reserves in the banking system and can ultimately influence the country’s money supply. When the central bank sells such instruments it absorbs money from the system.”

“Conversely, when it buys it injects money into the system. This method of trading in the market to control the money supply is called open market operations.”

OMOs – Advanced and emerging economies

Open market operations are a key instrument of monetary manipulation in the advanced economies (rich nations), and are rapidly becoming major tools in the emerging and developing countries too.

OMOs allow central banks significant flexibility in the volume and timing of monetary operations at their own initiative, encourage a business- and impersonal relationship with the players in the marketplace, and provide a useful alternative to direct controls.

Direct controls tend to have less of an impact as economies expand – markets by their nature eventually find a way to circumvent them, especially in today’s global economy.

In the same IMF article quoted above, Mr. Axilrod wrote:

“With more countries seeking to deregulate and unleash the potential of market forces, many policymakers and central bankers are grappling with ways to realize the full benefits of open market operations.”

Источник: https://marketbusinessnews.com/financial-glossary/open-market-operations-definition-meaning/

Open market operations — D3

OMOs - Open Market Operations

Data volumes are shown in millions of New Zealand dollars and interest rates are New Zealand interest rates.

The following data is recorded and detailed further in the series description:

  • Date held
  • Transaction type
  • Maturity date
  • Eligible securities
  • Total volume offered
  • Volume offered per maturity
  • Volume bid
  • Total amount transacted
  • Range of bids received
  • Range of successful bids
  • Weighted average successful bids
  • Settlement date
  • Total number of bids submitted
  • Total number of successful bids
  • Government Bond
  • Local Government Funding Agency Bond
  • Total Holdings

The Open Market Operation (OMO) is used to manage the level of liquidity in the New Zealand financial system. These operations are announced daily via electronic media.

The announcement indicates whether the RBNZ will inject or withdraw funds (using reverse repurchase transactions or repurchase transactions).

Operations are conducted as tenders and registered bidders telephone their bids to the RBNZ.

In March 2020, the Reserve Bank introduced a number of new facilities which include the Large Scale Asset Purchase programme (LSAP), Corporate Open Market Operation (COMO) and reintroduced the Term Auction Facility (TAF). The LSAP is held on Monday, Wednesday, Thursday and Friday. The COMO and TAF run each Tuesday in the Domestic Market Operations.

Prior to 11 December 2007 eligible securities were limited to Government bonds, Treasury bills and Reserve Bank bills (RBB). The Reserve Bank discontinued issuing RBB in 1999 but re-introduced them in November 2008 (refer below).

Beginning on 11 December, 2007, Kauri bonds have been accepted for use in the Bank’s Domestic Market Operations. The range of acceptable securities was expanded further in June 2008. Refer Eligible securities and haircuts for a full list of eligible securities.

Beginning in November 2008, in conjunction with the re-introduction of RBB, the Reserve Bank introduced a Term Auction Facility (TAF).

RBB tenders are held weekly on Monday and Wednesday afternoons, as required, and used to withdraw liquidity from the banking system.

The TAF operates in a similar manner to the OMO and is used to inject liquidity into the banking system. The TAF auction was discontinued in November 2009.

Data is available on our website from 1 November 1995.

Timeliness

The results of the OMOs and Term Auction Facility will be published on the day they are held. RBB tender results will released the day after the tender. Results will also be released via electronic media.

Statistics release calendar

The Statistics Release Calendar provides a long-term plan of scheduled releases. It is updated and released on the first working day of the month.

View the Statistics Release Calendar

Dissemination of terms and conditions under which official statistics are produced, including confidentiality of individual responses

Although there is no law that requires the RBNZ to compile and publish historical data on OMO's, the data are disseminated by the RBNZ as a service to the public.

Provision of information about revisions and advance notice of major changes in methodology

The data are final and are not subject to revision.Any changes to the processes of conducting the OMO's are announced via electronic media.Procedures are outlined in Section 3 of the Operating Rules and Guidelines for the Domestic Markets .

Dissemination of documentation on methodology and sources used in preparing statistics

For additional explanatory information see the RBNZ Bulletin, Vol 71 No 4, Dec. 2008.

Additional notes

From October 1994, the RBNZ introduced repurchase agreements into its open market operations. On 9 October 1995, the RBNZ stopped using secured loans in its open market operations.

Electronic Media

Includes Reuters and Bloomberg.

Date updated: June 2020

Most securities reported are wholesale market instruments: New Zealand Government bonds, Local Government Funding Agency bonds, Treasury bills, Corporate bonds, Reserve Bank bills, Commercial paper or Registered certificates of deposit (RCDs).

Interest bearing securities

These are written promissory agreements, whether marketable or not, in which one party promises to pay a stated sum on demand, or on a specified date, to the legal holder of the document. They may also involve a promise to pay stated interest at specified intervals over the term of the bond. Alternatively, they may be issued and traded at discount from their nominal value.

These include: Government bonds, Treasury bills, Reserve Bank bills, bills of exchange, commercial paper (including eurocommercial paper), certificates of deposit, debentures, convertible notes, and medium term notes issued by private placement.

Types of Government securities currently on issue are:

Government bonds which are denominated in New Zealand dollars, issued for terms greater than one year, and have a fixed interest coupon paid semi-annually in arrears.

Inflation-indexed bonds (IIB) are denominated in New Zealand dollars with a fixed coupon paid quarterly in arrears. On maturity, the principal and the indexed component of the bonds are redeemable. The index component refers to the incremental CPI adjustment.

Treasury bills are denominated in NZ dollars sold at a discount to the nominal value and carry no coupon. The bills are redeemable at par on maturity. Treasury bill tenders are generally held by NZDMO, on a weekly basis. Three maturities of regular Treasury bills are offered in each tender with roughly three, six and twelve month maturities.

Reserve Bank bills

Reserve Bank bills are denominated in New Zealand dollars, sold at a discount to par and carry no coupon. The bills can be discounted back to the RBNZ when they are within 28 days of maturity. The bills are redeemable at par on maturity. The Reserve Bank stopped issuing bills in February 1999 but re-introduced these in November 2008.

Commercial paper

Refers to private sector (including financial corporations), short-term (usually less than one year) discounted debt instruments.

Corporate bonds

Refers to New Zealand dollar denominated debt instruments, recorded on a New Zealand register, that are issued by private sector entities (including financial corporations). Issuers can be both New Zealand residents (domestic) and non-residents (Kauris).

Domestic corporate bonds

Refers to issues of New Zealand dollar denominated debt recorded on a New Zealand register by New Zealand incorporated entities.

Non-domestic corporate bonds

Refers to issues of New Zealand dollar denominated debt issued by a non-resident incorporated entity and recorded on a New Zealand register (such issues are sometimes referred to as «Kauri» bonds).

Registered certificates of deposits (RCDs)

Refers to issues of discounted, short-term (less than one year) debt securities, the majority of which are issued by banks. RCDs have largely taken the place of individual bank bills.

Repurchases and reverse repurchases

Arrangements under which one party sells a security at a specified price to another party with an agreement that the security will be repurchased at a fixed price on a specified future date.

The party which sells the security upon entering the arrangement is said to be «Repurchasing» the security.

The party which buys the security upon entering the arrangement is said to be «Reverse repurchasing» the security.

Asset-backed securities

Refers to issues of New Zealand dollar denominated assets which may include but not restricted to receivables (invoices, credit cards), commercial mortgage backed securities, hire-purchase agreements and equipment purchases.

Open market operations

The Open Market Operation (OMO) is used to manage the level of liquidity inthe New Zealand financial system. These operations are announced daily viaelectronic media.

The announcement indicates whether the RBNZ will inject orwithdraw funds (using reverse repurchase transactions or repurchasetransactions).

Operations are conducted as tenders and registered bidderstelephone their bids to the RBNZ.

Prior to 11 December 2007 eligible securities were limited to Governmentbonds, Treasury bills and Reserve Bank bills (RBB). (See Description fordefinition of terms) The Reserve Bank discontinued issuing RBB in 1999 butre-introduced them in November 2008.

Beginning on 11 December, 2007, Kauri bonds have been accepted for use in theBank's Domestic Market Operations. The range of acceptable securities wasexpanded further in June 2008. Refer to the Eligiblesecurities and haircuts page for a full list of eligible securities.

Term Auction facility

Beginning in November 2008, in conjunction with the re-introduction of RBB, the Reserve Bank introduced a Term Auction Facility (TAF).

The TAF operates in a similar manner to the OMO and is used to inject liquidity into the banking system. The TAF was discontinued in November 2009 and reintroduced in March 2020.

TAF auctions are held weekly on a Tuesday morning at 9:30am and are used to inject liquidity into the banking system.

Reserve Bank bill tender

Short-term discount securities issued by the Reserve Bank. The Bank ceased issuing Reserve Bank bills on 5 February 1999. All Reserve Bank bills and related advances to The Treasury were repaid by 9 April 1999.

Reserve Bank Bills were reintroduced in November 2008 to assist in managing the liquidity of the banking system.

The RBB tenders are held weekly, on Monday and Wednesday afternoons to withdraw liquidity from the banking system.

Large Scale Asset Purchase programme

In March 2020, the Large Scale Asset Purchase programme was introduced to inject money into the banking system with the aim of lowering borrowing costs to households and businesses through buying NZ Government Bonds, Local Government Funding Agency Bonds and NZ Government Inflation-Indexed Bonds in the secondary market. The LSAP is held every Monday, Wednesday, Thursday and Friday at 11am.

Corporate Open Market Operation

In March 2020, the Corporate Open Market Operation was introduced to support market functioning. The COMO is held weekly on a Tuesday morning at 11am where just Corporate and Asset-Backed eligible securities will be acceptable as collateral on a two name basis.

Total volume/ amount offered

The total nominal amount being offered in the tender.

Volume offered per maturity

More than one maturity date can be offered in an operation. A volume limitwill be set for each maturity offered. Bids may be accepted for one or all ofthe maturity dates, but the total amount accepted will normally not be more thanthe total volume offered.

Volume bid/ Total bids submitted

The total amount bid for the particular maturity date by all bidders.

Total amount transacted/ Total successful bids

The total amount accepted for the particular maturity date.

Range of bids received

The range of bids received, this includes successful and unsuccessfulbids.

Range of successful bids

The range of successful bids, from the minimum to the maximum rate.

Weighted average successful bids

Weighted average interest rates, weighted by volume per rate.

Date held

Refers to the date when the tender was held. This is not the settlement date where cash is exchanged for the security except for the RBNZ’s Open Market Operations where settlement occurs on the day of the tender.

Range of yields on unsuccessful bids

The range of unsuccessful bids, from the lowest accepted rate to the highest bid received. The lowest rate of the unsuccessful bids can be the same as the highest rate of the successful bids if successful bids have been pro-rated at the highest successful rate.

Weighted average yield of unsuccessful bids

Weighted average interest rates, weighted by volume per rate.

From 20 March 2020, the Reserve Bank will offer to lend funds through the Term Auction Facility (TAF). Further operation details on the TAF are available in a Domestic Markets media release.

0Zero or value rounded to zero
Not applicable
..Not available
boldRevised/new
italicsProvisional
light red backgroundHistorical

General notes

  • Individual figures may not sum to the totals due to rounding
  • Percentage changes are calculated on unrounded numbers
  • You are free to copy, distribute and adapt these statistics subject to the conditions listed on our copyright page.

Источник: https://www.rbnz.govt.nz/statistics/d3

Open Market Operations (Examples) | How does it works?

OMOs - Open Market Operations

An Open Market Operation or OMO is merely an activity performed by the central bank to either give or take liquidity to a financial institution or a group of financial institutions and the aim of OMO is not only to strengthen the liquidity status of the commercial banks but also to take surplus liquidity from them.

Steps of Open Market Operations

The central bank takes either of the following two main steps the economic conditions which are known as Open market operations:

  1. Buying government bonds from banks
  2. Selling government bonds to banks

Let us discuss each step of open market operations in detail:

#1 – Buying Government Bonds from Banks

When the central bank of the Country buys government bonds the economy is usually in the recessionary gap phase with unemployment being a big problem.

When the central bank buys government bonds it increases the money supply in the economy. The increased money supply decreases interest rates. The decreased interest rates cause consumption and investment spending to increase and hence the aggregate demand rises. Increased aggregate demand causes real GDP to increase.

Thus, buying government bonds from Banks increases the real GDP of the economy hence this method is also called Expansionary Monetary policy.

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#2 – Selling Government Bonds to Banks

The central banks sell government bonds to banks when the economy is facing inflation. The central bank tries to control inflation by selling government bonds to banks.

When government bonds are sold by the central bank, it sucks the excess money from the economy. This causes a decrease in the money supply. A decreased money supply causes interest rates to increase. An increased interest rate causes consumption and investment spending to fall and thus aggregate demand falls. The decrease in aggregate demand causes real GDP to fall.

Thus, selling government bonds to Banks decreases the real GDP of the economy hence this method is also called Contractionary Monetary policy.

# 1 – Permanent Open Market Operations

This is involved in outright buying and selling of government securities.  Such an operation is taken to have long-term benefits inflation, unemployment, accommodating the trend of currency in circulation etc.

#2 – Temporary Open Market Operations

This is usually done for the reserve requirements that are transitory in nature or to provide money for the short term. Such an operation is done using either repo or reverses repos. A repo is an agreement by which a trading desk buys a security from the central bank with a promise to sell it at a later date.

It can also be considered as a short-term collateralized loan by the central bank with the difference in the purchase price and the selling price as the interest rate on the security. Under a reverse repo, the trading desk sells the security to the central bank with an agreement to buy at a future date.

Overnight Repos and reverse repos are used for such temporary open market operations.

Open Market Operations Examples

Let’s understand the Open Market Operations Examples with the help of one more example:

  • The Federal Reserve Bank (Central Bank of United States) purchased $175 million MBS from banks that had been originated by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. Between January 2009-August 2010, it also bought $1.25 trillion in MBS that had been guaranteed by Fannie, Freddie, and Ginnie Mae. Between March 2009-October 2009, it purchased $300 billion of longer-term Treasuries from member banks.
  • As the Fed’s short-term Treasury bills matured, it used the proceeds to buy long-term Treasury notes to keep interest rates down. It continued to buy MBS with the proceeds of MBS that matured.

#1 – Inflation and Interest Rate Targeting

  • The major target of these operations is interest rates and inflation. The central tries to maintain inflation at a certain range so that the economy of the country grows at a stable and steady pace. This is taken by the central bank has a close relation with interest rates. When the central bank offers securities and government bonds to other banks and the public it affects the supply and demand of credit as well.
  • The buyers of the bonds deposit the money from their account to the central bank’s account thereby decreasing their own reserves. With the commercial banks buying such securities they will have less money to lend to the general public thus reducing their credit creation capacity. Thereby, impacting the supply of credit.
  • When the central bank sells the securities, there is a decrease in the price of the bonds and since bond prices and interest rates are inversely related, the interest rates rise. As the interest rates rise, there is a decrease in demand of credit.
  • With the decrease in supply and demand for credit due to fewer reserves and high-interest rates, consumption reduces thus reducing inflation.
  • When the central bank buys the securities the cycle is reversed, inflation rises and interest rates decrease.

#2 – Money Supply Targeting

  • The central bank may target and control the money supply in the economy. The central bank tries to maintain adequate liquidity in the banking system when it feels there is high liquidity it tries to suck the excess liquidity by selling bonds and vice-versa.
  • Eg. Reserve Bank of India conducted two Open market Operations (OMO) purchase auctions of Rs 10000 crores each on June 21, 2018, and July 19, 2018, to maintain durable liquidity.
  • This may be done to check the value of the currency with respect to fiat currencies and other foreign currencies.

Conclusion

Open market operations are the central bank’s monetary policy tool to maintain inflation, interest rates, money supply and liquidity in the economy. The central bank can buy or sell securities under such operations depending on the economic conditions.

Permanent measures are generally taken to target inflation and interest rates for the short-term duration while temporary measures are generally taken to check liquidity in the system for the near-term duration.

Depending on whether the general public buys or sells securities impacts the general public and business houses as the loans may get costlier or cheaper respectively.

This has been a guide to what is Open Market Operations. Here we discuss how open market works and the key steps taken by the Central Bank. We also discuss Open Market Operations examples along with its advantages. You may have a look at these articles below to learn more about Economics

Источник: https://www.wallstreetmojo.com/open-market-operations/

Open Market Operations: Explained with Examples

OMOs - Open Market Operations

Wednesday, August 21, 2019

By Laura Hopper, Public Affairs Staff

What are open market operations? This means the central bank is buying or selling securities in the open market as a way to implement monetary policy.

The most well-known role of the Federal Reserve is to set monetary policy.

The U.S. central bank employs various tools—such as purchases and sales of U.S. Treasury securities—to promote maximum employment and stable prices within the economy.

All eyes are focused on the statements issued after meetings of the Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC). People await the FOMC’s decision for its impact on the interest rates we use for home loans and other forms of credit.

While the FOMC statement itself gets the attention, it’s what happens afterward that truly makes a statement where the economy is concerned. This occurs through a process that takes place every day via the Federal Reserve Bank of New York, called open market operations.

Open market operations refer to central bank purchases or sales of government securities in order to expand or contract money in the banking system and influence interest rates.

This blog post explains:

  • How the federal funds rate and open market operations work.
  • How open market operations are one of the Fed's tools to influence the movement of interest rates and supply of credit.
  • How monetary policy actions make a broader impact on the economy in this post-Great Recession world.

First, Let’s Understand the Federal Funds Rate

The FOMC ordinarily meets eight times a year to assess the condition of the U.S. economy and make a decision regarding monetary policy, including whether to change the target range for the federal funds rate.

The federal funds rate is the interest rate that banks charge each other for overnight loans.

Banks may borrow in the federal funds market to ensure that they have enough reserves to meet their payments needs; to satisfy regulatory requirements, such as the minimum requirements for reserves and liquidity; and to receive the interest paid on reserve balances by the Fed.

Movement in the federal funds target rate most closely affects other shorter-term interest rates, such as on three-month Treasury bills. But it can also affect other interest rates in the economy, such as rates for consumer and business loans and longer-term debt.

The FOMC may vote to increase the target range for the federal funds rate, to decrease the target range, or to leave it unchanged.

These monetary policy decisions can, in turn, affect consumer and producer decisions that ultimately impact the level of employment and inflation in the U.S. economy.

Now, How Open Market Operations Work

It’s important to understand that the Federal Reserve can buy or sell securities, including government securities Treasury bonds. These buy-and-sell transactions are the “operations.”

The term “open market” refers to the fact that the Fed doesn’t buy securities directly from the U.S. Treasury. Instead, securities dealers compete on the open market price, submitting bids or offers to the Trading Desk of the New York Fed through an electronic auction system.

If the FOMC decides to change the target range for the federal funds rate, the baton passes to the Trading Desk in the form of a policy directive. This directive includes the target range for the fed funds rate and an order to buy or sell government securities to hit that target.

The use of open market operations as a monetary policy tool ultimately helps the Fed pursue its dual mandate—maximizing employment, promoting stable prices—by influencing the supply of reserves in the banking system, which leads to interest rate changes.

Note: Most operations are not outright purchases or sales of transactions but rather repurchase or reverse repurchase transactions. The New York Fed’s Open Market Operations tutorial describes these “repos” or “reverse repo transactions” in more detail.

Tapping the accelerator: expansionary monetary policy

When the Trading Desk purchases government securities, such as Treasury bonds, the Fed deposits funds into the bank accounts of the sellers.

That payment becomes part of the reserve balances that commercial banks hold at the Fed; this increases the amount of funds that banks have available to lend.

This injection of reserves into the banking system puts downward pressure on the federal funds rate, which then puts downward pressure on other interest rates and therefore encourages more borrowing throughout the economy.

Policymakers refer to this as “easing” or expansionary monetary policypushing on the gas pedal to give the economy more fuel and to encourage economic activity, such as in times of slower employment growth or a potential economic downturn.

Tapping the brakes: contractionary monetary policy

When the Fed sells some of the government securities it holds, buyers pay from their bank accounts. This shrinks the funds that banks have available to lend.

That creates upward pressure on the federal funds rate, since banks have fewer reserves available to lend and will charge more to lend them.

As the federal funds rate increases, so do other rates. Individuals and businesses are then less ly to borrow, since it’s more expensive, and may be more ly to save their money and earn that higher interest.

Policymakers call this “tightening” or contractionary monetary policy—tapping the brakes to slow down the car and restrain spending when price stability is at risk due to higher-than-desired inflation.

Monetary Policy in the Post-Recession Economy

Open market operations are one of multiple tools that the Federal Reserve uses to enact and maintain monetary policy, along with changing the terms and conditions for borrowing at the discount window and adjusting reserve requirement ratios.

These tools have been around since before the financial crisis.

After reducing the federal funds target close to zero during the financial crisis, the FOMC turned to another type of policy to provide liquidity to the financial system and to encourage recovery: the purchase of large amounts of longer-term U.S. Treasury securities and mortgage-backed securities, also through open market operations.

Such large-scale operations are widely referred to as quantitative easing, which substantially expanded the size of the Fed’s balance sheet during the crisis and subsequent recovery.

The Fed paid for those purchases by adding funds to reserve deposits, resulting in reserve balances far in excess of banks’ legal requirements.

During the financial crisis and recession, monetary policymakers looked beyond traditional open market operations to influence the federal funds rate.

The Fed undertook a process—sometimes referred to as quantitative tightening—to unwind the asset side of its balance sheet. But with ample reserves on the liabilities side, open market operations evolved.

With such a large quantity of reserves in the banking system, the Federal Reserve could no longer effectively influence the federal funds rate by small changes in the supply of reserves, explained Economic Education Coordinator Scott Wolla in a recent issue of Page One Economics.

For example, he said, a relatively small increase in reserves will not lower interest rates, nor will a relatively small reduction in reserves raise short-term interest rates.

The Fed has modified its monetary policy strategy to include a new tool supplied by Congress during the financial crisis: Paying interest on the reserves that banks hold at the Federal Reserve in excess of legal requirements, and then changing that interest rate periodically to ease or contract policy. This tool is often referred to as the IOER (or interest on excess reserves) rate.

The Fed can lower the rate paid on excess reserves to encourage banks to lend their reserves or increase the rate to encourage banks to hold more excess reserves.

Wolla noted that “the Federal Reserve moves the [federal funds rate] into the target range set by the FOMC primarily by adjusting the IOER rate.”

A Quick Recap

Expansionary monetary policy action: The Trading Desk at the New York Fed is directed to engage in open market operations, including purchases of government securities, to ensure that the federal funds rate trades within a new lower range set by the FOMC.

Contractionary monetary policy action: The Desk is directed to engage in open market operations, including the sale of government securities, to ensure the fed funds rate trades within a new higher range the FOMC set.

In a post-Great Recession world: During the financial crisis and recession, monetary policymakers looked beyond traditional open market operations to influence the federal funds rate. The Fed made large-scale open market purchases to encourage economic recovery.

More recently, the Fed has adjusted the interest paid on excess reserves to restore the fed funds rate to a more normal level. While the interest rate on excess reserves gives the Fed an additional tool to conduct monetary policy, open market operations remain a key tool, as well.

Additional Resources

Want to learn more? Check out these St. Louis Fed resources.

Источник: https://www.stlouisfed.org/open-vault/2019/august/open-market-operations-monetary-policy-tools-explained

Board of Governors of the Federal Reserve System

OMOs - Open Market Operations

Open market operations (OMOs)—the purchase and sale of securities in the open market by a central bank—are a key tool used by the Federal Reserve in the implementation of monetary policy.

The short-term objective for open market operations is specified by the Federal Open Market Committee (FOMC). OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York.

The range of securities that the Federal Reserve is authorized to purchase and sell is relatively limited. The authority to conduct OMOs is found in section 14 of the Federal Reserve Act.

The Federal Reserve Bank of New York publishes a detailed explanation of OMOs each year in its Annual Report.

OMOs can be divided into two types: permanent and temporary. Permanent OMOs involve outright purchases or sales of securities for the System Open Market Account (SOMA), the Federal Reserve's portfolio.

Traditionally, permanent OMOs are used to accommodate the longer-term factors driving the expansion of the Federal Reserve's balance sheet—primarily the trend growth of currency in circulation.

During and after the financial crisis, permanent OMOs were used to adjust the Federal Reserve’s holdings of securities in order to put downward pressure on longer-term interest rates and to make financial conditions more accommodative.

Currently, permanent OMOs are used to implement the FOMC’s policies of reinvesting principal payments from its holdings of agency debt and mortgage-backed securities (MBS) in agency MBS and of rolling over maturing Treasury securities at auction.

  • FAQs: Agency MBS Reinvestment Purchases
  • FAQs: Treasury Rollovers

Temporary OMOs are typically used to address reserve needs that are deemed to be transitory in nature. These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos or RRPs).

Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future. A repo is the economic equivalent to a collateralized loan by the Federal Reserve, in which the difference between the purchase and sale prices reflects interest.

Under a reverse repo, the Trading Desk sells a security under an agreement to repurchase that security in the future. A reverse repo is the economic equivalent of collateralized borrowing by the Federal Reserve.

Overnight reverse repos are currently used as a tool to help keep the federal funds rate in the target range established by the FOMC.

  • FAQs: Reverse Repurchase Agreement Operations

The Federal Reserve Bank of New York publishes details on its website of all permanent and temporary operations.

  • Permanent Open Market Operations
  • Temporary Open Market Operations

Each OMO affects the Federal Reserve's balance sheet; the size and nature of the effect depends on the specifics of the operation. The Federal Reserve publishes its balance sheet each week in the H.4.

1 statistical release, «Factors Affecting Reserve Balances of Depository Institutions and Condition Statement of Reserve Banks.

» The release separately reports securities held outright, commitments to purchase and sell securities, repos, and reverse repos.

Before the global financial crisis, the Federal Reserve used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate—the interest rate at which depository institutions lend reserve balances to other depository institutions overnight—around the target established by the FOMC. The Federal Reserve's approach to the implementation of monetary policy has evolved considerably since the financial crisis, and particularly so since late 2008 when the FOMC established a near-zero target range for the federal funds rate.

Monetary Policy Normalization

During the policy normalization process that commenced in December 2015, the Federal Reserve will use overnight reverse repurchase agreements (ON RRPs)—a type of temporary OMO—as a supplementary policy tool, as necessary, to help control the federal funds rate and keep it in the target range set by the FOMC.

In addition, in October 2017 the FOMC initiated a balance sheet normalization program that gradually reduced the Federal Reserve’s securities holdings by decreasing its reinvestment of principal payments received from securities held in the SOMA—such reinvestments are permanent OMOs.

For additional information, see: www.federalreserve.gov/monetarypolicy/policy-normalization.htm

Large-Scale Asset Purchase Programs

From the end of 2008 through October 2014, the Federal Reserve greatly expanded its holding of longer-term securities through open market purchases with the goal of putting downward pressure on longer-term interest rates and thus supporting economic activity and job creation by making financial conditions more accommodative.

  • From December 2008 to August 2010, to help reduce the cost and increase the availability of credit for the purchase of houses, the Federal Reserve purchased $175 billion in direct obligations of Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. In addition, from January 2009 to August 2010, the Federal Reserve purchased $1.25 trillion in MBS guaranteed by Fannie Mae, Freddie Mac, and Ginnie Mae. Detailed transaction level information for the MBS purchase program is available at the link below.
    • Agency MBS Purchase Program, January 2009 — August 2010
  • From March 2009 to October 2009, the Federal Reserve purchased $300 billion of longer-term Treasury securities to help improve conditions in private credit markets.
  • From November 2010 to June 2011, the Federal Reserve further expanded its holdings by purchasing an additional $600 billion of longer-term Treasury securities.
  • Starting in September 2012, the Federal Reserve further increased policy accommodation by purchasing additional MBS at a pace of $40 billion per month.
  • Starting in January 2013, the Federal Reserve began purchasing longer-term Treasury securities at a pace of $45 billion per month, following the completion of the maturity extension program in December 2012.
  • In December 2013, the Federal Reserve announced that it would modestly slow the pace of additional MBS and longer-term Treasury securities purchases and would ly further reduce the pace of asset purchases in measured steps if incoming information broadly shows ongoing improvement in labor market conditions and inflation moving back toward the FOMC's 2 percent longer-run objective. Over subsequent months, the FOMC further reduced the pace of asset purchases in measured steps, and concluded the purchases in October 2014.

Maturity Extension Program

Between September 2011 and December 2012, the Federal Reserve used open market operations to extend the average maturity of its holdings of Treasury securities in order to put downward pressure on longer-term interest rates and to help make broader financial conditions more accommodative.

  • On September 21, 2011, the FOMC announced that it would extend the average maturity of its holdings of Treasury securities—by purchasing $400 billion par of Treasury securities with remaining maturities of 6 years to 30 years and selling an equal par amount of Treasury securities with remaining maturities of 3 years or less—by the end of June 2012.
  • On June 20, 2012, the FOMC announced that it would continue its maturity extension program through the end of 2012, resulting in the additional purchase, as well as the sale and redemption, of about $267 billion in Treasury securities.

Single-Tranche Term Repurchase Agreements

From March 2008 to December 2008, the Federal Reserve conducted a series of term (28-day) repurchase transactions to increase the availability of term financing, to alleviate the strains in the financial markets, and to support the flow of credit to U.S. households and businesses. Detailed transaction level information for this program is available at the link below.

  • Single-Tranche Term Repurchase Agreements, March — December 2008

Securities Lending

The Federal Reserve Bank of New York operates a securities lending program to provide a temporary source of Treasury and agency securities to promote the smooth clearing of the Treasury and agency securities market.

Securities loans are awarded to primary dealers a competitive auction for overnight loans against other Treasury securities as collateral. A description of the program is presented on the website of the Federal Reserve Bank of New York, as are the terms of the program and the securities lending operations that are conducted.

Securities lent on an overnight basis through this facility are presented in table 1A of the H.4.1 statistical release.

Источник: https://www.federalreserve.gov/monetarypolicy/bst_openmarketops.htm

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