Open Market Operations

Open market operations involve the buying and selling of securi­ties by the Federal Reserve. A Federal Reserve securities transac­tion changes the volume of reserves in the depository system: A purchase adds to nonborrowed reserves, and a sale reduces them. In contrast, the same transaction between financial institutions, business firms, or individuals simply redistributes reserves within the depository system without changing the aggregate level of reserves.

When the Federal Reserve buys securities from any seller, it pays, in effect, by issuing a check on itself. When the seller deposits the check in its bank account, the bank presents the check to the Fed­eral Reserve for payment. The Federal Reserve, in turn, honors the check by increasing the reserve account of the seller's bank at the Federal Reserve Bank. The reserves of the seller's bank rise with no offsetting decline in reserves elsewhere; consequently, the total volume of reserves increases. Just the opposite occurs when the Federal Reserve sells securities: The payment reduces the re­serve account of the buyer's bank at the Federal Reserve Bank with no offsetting increase in the reserve account of any other bank, and the total reserves of the banking system decline. This characteristic—the dollar-for-dollar change in the reserves of the depository system with a purchase or sale of securities by the Federal Reserve—makes open market operations the most pow­erful, flexible, and precise tool of monetary policy.

In theory, the Federal Reserve could provide or absorb bank re­serves through market transactions in any type of asset. In prac­tice, however, most types of assets cannot be traded readily enough to accommodate open market operations. For open market operations to work effectively, the Federal Reserve must be able to buy and sell quickly, at its own convenience, in whatever volume may be needed to keep the supply of reserves in line with prevailing policy objectives. These conditions require that the instrument it buys or sells be traded in a broad, highly active market that can accommodate the transactions without distortions or disruptions to the market itself.

The market for U.S. government securities satisfies these condi­tions, and the Federal Reserve carries out by far the greatest part of its open market operations in that market. The U.S. govern­ment securities market, in which overall trading averages more than $100 billion a day, is the broadest and most active of U.S. financial markets. Transactions are handled over the counter (that is, not on an organized stock exchange), with the great bulk of orders placed with specialized dealers (both bank and nonbank). Although most dealer firms are York City, a network of telephone and services links dealers and customers regardless of their location to form a worldwide market.

The Federal Reserve's holdings of government securities are tilted somewhat toward Treasury bills, which have maturities of one year or less. The average maturity of the Federal Reserve’s portfolio of Treasury issues is only a little more than 3 years, somewhat below the average maturity of roughly 5¹/₂ years for all outstanding marketable Treasury securities. In the 1980s, the average maturity of the Federal Reserve's portfolio shortened somewhat, as the Federal Reserve began to emphasize liquidity in managing its portfolio. More recently the Federal Reserve has slightly lengthened the average maturity of its portfolio.

Дата добавления: 2014-12-29