Series 52: 7.4.2.1. Open Market Operations

7.4.2.1. Open Market Operations

In open market operations, the Federal Reserve buys and sells U.S. Treasuries and federal agency securities in the secondary market. This is the most common tool of the Fed and you should understand it fully for the exam. To grow the economy, the Fed will purchase government securities, such as Treasuries and agency securities. The purchase of securities by the Fed puts more money into the general economy. The greater availability of money causes interest rates to go down, because money is now more available and less costly to borrow. The lower interest rates lead consumers to borrow more and then spend more, growing the economy.

If the Fed would like to slow the economy, and this happens most often if inflation is rising too quickly, they will sell many of the government securities they hold. When the Fed sells Treasuries, money is used by banks and the public to buy the securities, which leads to a reduction in the money supply and an increase in the cost of credit. If borrowing is more expensive, Americans borr