Fed Tools For Controlling the

Money Supply: Open Market

Operations
• The main “thing” the Fed
buys and sells is U.S.
government securities, which
are bonds the government
originally sold to investors
when it needed to borrow
funds.
• The Fed buys and sells such
securities in the financial
market, it is said to be
engaged in open market
operations.
 Open Market Purchases
• Consider an open market purchase of government
securities by the Fed.
• The Fed receives the securities from a bank, and
the bank’s reserves increase by the amount the
purchase (remember Reserves = Bank deposits at
the Fed + Vault Cash).
• When the banks have a reserve increase and no
other bank has a similar decline, the money supply
expands through a process of increased loans and
checkable deposits.
 Open Market Sales
• Open market sales refer to Fed sales of
government securities to banks and others.
• In one of these sales, a bank buys securities from
the Fed and the money is taken from the reserves
of the bank.
• This decreases the money supply by having the
bank reduce total loans outstanding, which
reduces the total volume of checkable deposits and
money in the economy.
Open Market Operations
Fed Monetary Tools & their
Effects on the Money Supply