Open Market Operations Explained
the term open market operations refers to a monetary policy tool in which central banks buy and sell bonds to regulate the money supply in the economy. the united states employs open market operations through the federal reserve bank. one of the fed's goals is to limit inflation during periods of healthy economic growth. by reducing the economy supply of funds, the bank puts the brakes on the economy if it's expanding too quickly. when the economy ? more sluggish, its objectives may change. the fed may, for instance, start pumping money into the economy until unemployment dips to a certain level. so, how does a central bank like the fed regulate the money supply. to increase the money supply, the fed will purchase bonds from banks. this increases the funds that banks can use as loans to individuals and businesses. more cash in the banks results in lower short-term interest rates and when borrowing costs are low, economic activity tends to rise. conversely, if the fed sells bonds to the banks, it takes money out of the system. this elevates short-term rates, eventually leading to reduced economic activity. the fed's federal open market committee meets eight times a year to reevaluate its strategy. based on its outlook for growth and inflation, the committee may decide to increase interest rates through bond transactions, decrease them or keep them unchanged. while banking practices vary from one country to another, numerous central banks around the world use open market operations for the same overall purpose. while a government can take other actions to influence ?, securities trading is one of the quickest and most effective ways to control economic activity.
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