Open Market Operations
Central bank purchases or sales of government securities to control the money supply and interest rates.
What is Open Market Operations?
Open market operations (OMOs) are the primary tool by which central banks — such as the Federal Reserve — implement monetary policy. The central bank buys or sells government securities (Treasury bonds and bills) in the open market. When it buys securities, it pays by crediting banks' reserve accounts, increasing the money supply and pushing interest rates down. When it sells securities, banks pay with reserves, reducing the money supply and pushing rates up. The Federal Reserve conducts OMOs to keep the federal funds rate — the overnight lending rate between banks — near its target. Large-scale OMOs (buying long-term bonds to lower long-term rates) are known as quantitative easing.
Example
When COVID-19 hit in March 2020, the Federal Reserve conducted massive open market operations — buying Treasuries and mortgage-backed securities at a rate of $120 billion per month at peak — to inject liquidity, lower yields, and support credit markets. Total Fed holdings grew from $4 trillion to over $9 trillion by 2022.