Open Market Operations
Plain definition
The buying and selling of government securities by a central bank to change bank reserves, the money supply, and short-term interest rates.
In economics
Open market operations are the central bank's main routine tool. Buying securities injects reserves into banks, expanding the money supply and pushing rates down; selling securities drains reserves, contracting money and pushing rates up. They are flexible, precise, and easily reversed.
Example
The Fed wants to lower the federal funds rate, so it buys $50 billion in Treasury bonds from banks. Banks' reserve balances rise, the money supply expands, and with more reserves available, the overnight lending rate falls toward the Fed's target.
Open market operations are confused with quantitative easing. Routine OMOs adjust short-term rates with relatively small trades; quantitative easing is large-scale asset buying used when rates are already near zero to push down longer-term rates and flood the system with reserves.