Series 3: 6.1.6.2.1. Open Market Operations

6.1.6.2.1. Open Market Operations

The most common tool of the Fed is its open market operations, by which it buys and sells government securities in the secondary market. To encourage economic growth, the Fed will purchase government securities, such as Treasuries and federal 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 drop, because money is now more available and less costly to borrow. The lower interest rates lead consumers to borrow and spend more, growing the economy.

If the Fed would like to slow the economy, when inflation is rising too quickly, for instance, it will sell many of the government securities it holds. When the Fed sells Treasuries, money is used by banks and the public to buy the securities, which withdraws money from the economy and increases the cost o