Permanent Open Market Operations - POMO


DEFINITION of 'Permanent Open Market Operations - POMO'

When the Federal Reserve buys or sells securities outright in order to permanently add or drain the reserves available to the U.S. banking system. Such permanent open market operations are the opposite of temporary open market operations, which are used to add or drain reserves available to the banking system on a temporary basis, thereby influencing the federal funds rate. Permanent open market operations are just one of the tools used by the Federal Reserve to implement monetary policy.

BREAKING DOWN 'Permanent Open Market Operations - POMO'

Open market operations are one of the three tools used by the Federal Reserve for implementing monetary policy; the other two are the discount rate and reserve requirements. Open market operations are conducted by the Federal Open Market Committee (FOMC), while the discount rate and reserve requirements are set by the Federal Reserve's board of governors.

Open market operations significantly influence the amount of credit available in the banking system. When the Federal Reserve buys securities from banks, it adds liquidity to the banking system, pushing interest rates lower. The proceeds from the sale of these securities can be used by banks for lending purposes, thereby stimulating economic activity. Conversely, when the Federal Reserve sells securities to banks, it drains liquidity from the banking system, pushing interest rates higher. Banks have a lower amount of funds to lend, which acts as a brake on economic activity.

The FOMC may occasionally have a different operating goal for its open market operations. For instance, in 2009, it announced a longer-dated Treasury purchase program as part of its permanent open market operations. The objective of this program was to help improve conditions in private credit markets after an unprecedented credit crunch gripped global financial markets in 2008 and 2009.

  1. Federal Funds Rate

    The interest rate at which a depository institution lends funds ...
  2. Federal Open Market Committee - ...

    The branch of the Federal Reserve Board that determines the direction ...
  3. Ben Bernanke

    The chairman of the board of governors of the U.S. Federal Reserve. ...
  4. Discount Window

    Credit facilities in which financial institutions go to borrow ...
  5. Open Market Operations - OMO

    The buying and selling of government securities in the open market ...
  6. Equilibrium

    The state in which market supply and demand balance each other ...
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