Open market operations

Open market operations are the buying and selling of government securities by the Federal Reserve. Traditionally they were the Fed's main day to day tool for keeping the federal funds rate within its target range. When the Fed buys securities, it adds reserves to the banking system, which pushes the rate banks charge each other lower. When it sells securities or lets them roll off, it drains reserves from the system, pushing the rate higher.

Since the 2008 financial crisis the banking system has held far more reserves than it needs, so small purchases and sales no longer move the rate much. The Fed now steers the federal funds rate mainly through the interest it pays banks on their reserve balances and the rate on its overnight reverse repo facility. Open market operations still keep reserves ample and smooth out pressure in short term funding markets, through outright purchases and through repo and reverse repo operations.

This is distinct from quantitative easing, which involves buying securities in far larger amounts over an extended period specifically to push down longer term rates and add liquidity during a period of economic stress, well beyond what routine open market operations are meant to do. Open market operations rarely make headlines on their own, but they remain part of the plumbing that keeps the interest rate the Fed announces at each meeting reflected in the rate banks charge one another.