A:

Open market operations are a mechanism by which monetary policy is transmitted. Monetary policy aims to find the best balance between economic growth and inflation by targeting the money supply. When the economy has excess capacity, money supply is increased. When the economy is near full capacity and inflationary pressures are building, money supply is decreased.

Besides open market operations, central banks also cut or raise interest rates to affect the money supply. Interest rates are a very effective tool when the economy is full of inflationary pressures. Since the Great Recession, a lack of significant inflation has resulted in interest rates near zero all over the world.

Since then, open market operations have become central banks' primary tool to affect the money supply. At the zero bound, if central banks want to expand money supply, they engage in quantitative easing (QE). QE is essentially monetizing government debt via asset purchases. This results in an expanded money supply chasing fewer securities.

The purchased securities move onto the central banks' balance sheet. These securities can be held until maturity if economic conditions do not improve, or they can be sold back into the market if inflationary pressures do begin to build up. The Federal Reserve engaged in QE from 2009 to 2014 with asset purchases totaling $3.6 trillion.

These efforts prevented deflation from setting into the economy, record low interest rates and rising asset prices. Both stocks and bonds rose together during this time period, an unusual occurrence. Going forward as long as deflation remains a larger threat than inflation, open market operations will be the primary tool for central bankers to implement monetary policy.

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