RESPOND TO THE FOLLOWING EITHER AGREEING DISAGREEING OR ADDING ADDITIONAL KNOWLEDGE.

Open market operations or OMOs are the purchase and sale of securities in the open market by a central bank. This is one of the three main policy tools that the federal reserve uses for monetary policy. Monetary policy "refers to the actions undertaken by a central bank to influence the availability and cost of money and credit to help promote national economic goals." In the original text, it discusses how the near-zero target range for the federal funds rate has changed the way OMOs are used. The federal reserve expanded their holdings of longer-term securities in order to put downward pressure on long term interest rates. This was done to support economic activity and to foster an environment that would lead to job creation through more accommodative financial conditions.

To put the idea of open market operations into easier to understand terms you could say that the central bank is able to increase the money supply and lower market interest rates by purchasing securities using newly created money. On the other hand, the central bank can always sell securities from the balance sheet to take money out of circulation and raise interest rates. The two goals set the fed have when either selling or buying securities are thus, expansionary and contractionary. When the fed is trying to expand it wants to pour money into the banks which then pressures the banks to lend more money to consumers. This creates competition between the banks and subsequently lowers the rates. When the fed is trying to contract is does the opposite and this raises the interest rates and lowers consumer spending.

Open market operations have long been one of the strongest tools in the box for the fed and understanding how they work will give you a better sense of the banking environment.