Open market operations

Open market operations are central-bank purchases and sales of securities that change bank reserves and influence short-term interest rates.

Bank reserves: Deposits that commercial banks hold at a central bank, plus cash held in their vaults. Central-bank purchases and sales directly alter the reserve balances banks hold.
Federal Reserve: The central bank of the United States, responsible for monetary policy and financial stability. Its securities portfolio and trading desk provide a prominent example of open market operations.
Benjamin Strong: An American central banker who led the Federal Reserve Bank of New York from 1914 to 1928. Strong helped develop open-market purchases as a deliberate tool for managing credit conditions.
Liquidity trap: A situation in which very low interest rates make conventional monetary easing less effective. When short-term rates approach their floor, ordinary reserve-adding operations may have little room to lower them.
Discount window: A central-bank facility through which eligible banks borrow funds, typically against collateral. It supplies reserves through loans rather than through purchases of securities in the market.
Federal funds rate: The interest rate at which U.S. banks lend reserve balances to one another overnight. In the United States, reserve conditions have historically helped steer this overnight rate.
Federal Open Market Committee: The Federal Reserve body that sets U.S. monetary policy, including a target range for the federal funds rate. Its policy decisions guide the domestic operations used to implement the target.
Federal Reserve Bank of New York: The regional Federal Reserve Bank that conducts many U.S. monetary-policy operations on behalf of the Federal Reserve System. Its trading desk became the operational center for U.S. open-market transactions.
Yield curve: A graph showing yields on bonds of different maturities for a given issuer and credit quality. Large-scale purchases can affect longer-term yields and reshape the curve beyond overnight rates.
Forward guidance: Central-bank communication about the likely future path of monetary policy. It can influence interest-rate expectations without changing reserves through an immediate trade.

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