The previous Friday Funnies looked at the Open Market Operations. This week’s comic continues the discussion of the Feds open market operations, but this time for those that increase the federal funds rate.
The opposite occurs when the Fed sells government securities, an unusual occurrence. The Fed collections payments for the securities by subtracting the amount of the sale from the account that the buyer’s bank has at the Fed. The bank, in turn, subtracts the amount from the buyer’s account. Banks now have less to lend, the federal funds rate may rise, and some borrowing may be discouraged. That means people may buy fewer cars and businesses may be less new equipment.
The Fed does not conduct its open market operations with all individuals and financial institutions.
Rather, the Fed deals with about twenty large firms – brokers and broker-dealers – that buy and sell government securities and can handle the large purchases and sales efficiently, quickly, and safely. Indeed, the Fed’s open market operations are conducted electronically in a matter of minutes.
I actually think there are a bit more than twenty institutions now involved. I’m also guessing these transactions now only take seconds to complete, not minutes.
When the Fed decides to change its monetary policy, it uses open market operations to implement the change.
Next week we’ll cover the other reasons beyond monetary policy that the Fed conducts open market operations.
