Permanent Open Market Operations - POMO

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Federal Funds Rate

    The interest rate at which a depository institution lends funds ...
  2. Discount Window

    Credit facilities in which financial institutions go to borrow ...
  3. Federal Open Market Committee - ...

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

    The chairman of the board of governors of the U.S. Federal Reserve. ...
  5. Open Market Operations - OMO

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

    A deflationary spiral is when a period of decreasing prices (deflation) ...
RELATED FAQS
  1. How do open market operations affect the U.S. money supply?

    Formulating a country's monetary policy is extremely important when it comes to promoting sustainable economic growth. More ... Read Full Answer >>
  2. How can I create a yield curve in Excel?

    You can create a yield curve in Microsoft Excel if you are given the time to maturities of bonds and their respective yields ... Read Full Answer >>
  3. What are the different formations of yield curves?

    There are three main different formations of yield curves: normal, inverted and flat yield curves. The yield curve describes ... Read Full Answer >>
  4. What does a large multiplier effect signify?

    The multiplier effect depends on banks' reserve requirements. In macroeconomics, if a country exhibits a large multiplier ... Read Full Answer >>
  5. What is the criteria for a simple random sample?

    Simple random sampling is the most basic form of sampling and can be a component of more precise, more complex sampling methods. ... Read Full Answer >>
  6. How is money supply used in monetary policy?

    Regulating the money supply is the sole tool of the Federal Reserve's monetary policy. The Federal Reserve can affect the ... Read Full Answer >>
Related Articles
  1. Personal Finance

    How The U.S. Government Formulates Monetary Policy

    Learn about the tools the Fed uses to influence interest rates and general economic conditions.
  2. Bonds & Fixed Income

    The Fed's New Tools For Manipulating The Economy

    The economy can be volatile when left to its own devices. Find out how the Fed smoothes things out.
  3. Investing Basics

    What is a Nominal Value?

    The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life.
  4. Economics

    Explaining the Human Development Index

    The Human Development Index (HDI) is a metric developed by the United Nations to take the emphasis off economic growth and focus on human wellbeing.
  5. Investing

    What A Rate Hike May Mean For Stocks

    By the end of the year, investors will likely be contending with the first Federal Reserve (Fed) rate hike in nearly a decade.
  6. Professionals

    Why You Should Avoid Fixating on Bond Duration

    Financial advisors and their clients should then focus on a bond fund’s portfolio rather than relying on any single metric like duration.
  7. Forex Strategies

    What Makes the EUR/USD A Risky Trade Now?

    What are the current risks of trading the EUR/USD pair? The Fed may raise interest rates this summer and the ECB has begun a quanitative easing program.
  8. Investing

    Why Some Investors Are Tilting Toward TIPS

    Last month’s five-year TIPS auction drew nearly $48 billion in interest, a sign of recent renewed demand for this inflation indexed asset among investors.
  9. Economics

    What is the International Monetary Fund?

    The International Monetary Fund fosters global monetary cooperation and sustainable economic growth.
  10. Economics

    The Pros & Cons of a Trade Deficit

    Is a trade deficit, also known as a current account deficit, beneficial or detrimental to a country's economy?

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center