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.

RELATED TERMS
  1. Federal Discount Rate

    The interest rate set by the Federal Reserve that is offered ...
  2. Federal Reserve Credit

    Refers to the process of the Federal Reserve lending funds on ...
  3. Free Reserves

    A measurement of a bank's reserves that is equal to the difference ...
  4. Federal Open Market Committee - ...

    The branch of the Federal Reserve Board that determines the direction ...
  5. Division Of Reserve Bank Operations ...

    An entity under the Federal Reserve System that manages certain ...
  6. Reservable Deposit

    A bank deposit subject to reserve requirements. Reserve requirements ...
Related Articles
  1. Trading

    Open Market Operations Explained

    The term “open market operations” refers to a monetary policy tool in which central banks buy and sell bonds to regulate the money supply in the economy. The United States employs open market ...
  2. Trading

    Understanding the Federal Open Market Committee

    The Federal Open Market Committee is the branch of the Federal Reserve Board that determines monetary policy.
  3. Personal Finance

    Explaining the Federal Discount Rate

    The federal discount rate is the rate at which eligible banks or other depository institutions can borrow funds from a Federal Reserve bank.
  4. Investing

    What's the Salary of the Chairman of the Federal Reserve?

    The chairman of the Federal Reserve oversees the U.S. banking system.
  5. Insights

    What Do the Federal Reserve Banks Do?

    These 12 regional banks are involved with four general tasks: formulate monetary policy, supervise financial institutions, facilitate government policy and provide payment services.
  6. Investing

    The Treasury And The Federal Reserve

    Find out how these two agencies create policies to stimulate the economy in tough economic times.
RELATED FAQS
  1. How do open market operations affect the money supply of an economy?

    Understand how open market operation affect the supply of money in the economy and learn the specific ways the Federal Reserve ... Read Answer >>
  2. Why would the Federal Reserve change the reserve ratio?

    Understand the Federal Reserve's monetary policy and the tools it uses to change that monetary policy. Learn about the reserve ... Read Answer >>
  3. How does the Federal Reserve's set discount rate affect my personal finances?

    Discover how the Federal Reserve implements its chosen monetary policy through its discount rates, and how these actions ... Read Answer >>
  4. How is the Federal Reserve audited?

    Learn how the Federal Reserve gets audited. Due to gridlock, the Federal Reserve has been forced to take on the role of stimulating ... Read Answer >>
  5. What are the implications of a high Federal Funds Rate?

    Learn the implications of a high federal funds rate, which include constriction of the money supply, a stronger dollar and ... Read Answer >>
  6. What impact does the Federal Reserve have on a bank's profitability?

    Learn how the Federal Reserve impacts a bank's profitability with its influence on the discount rate, federal funds rate ... Read Answer >>
Hot Definitions
  1. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  2. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
  3. Portable Alpha

    A strategy in which portfolio managers separate alpha from beta by investing in securities that differ from the market index ...
  4. Run Rate

    1. How the financial performance of a company would look if you were to extrapolate current results out over a certain period ...
  5. Hard Fork

    A hard fork (or sometimes hardfork) is a radical change to the protocol that makes previously invalid blocks/transactions ...
  6. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
Trading Center