What Is Go-Around?
Go-around is the Federal Reserve’s process for soliciting bid or offer prices from primary dealers for open market operations (OMO).
OMO is when the central bank buys or sells Treasury securities in the open market in order to add or remove money from the money supply. This process involves an auction that requires the solicitation of bids or offers from qualified dealers.
- Go Around describes the process by which the Federal Reserve auctions Treasury Securities.
- Treasury auctions involve a relatively small set of qualified buyers known as primary dealers.
- The goal of the Go Around is to obtain the best price at which to sell all the Treasuries in a particular auction.
- These dealers may then re-sell their holdings on the secondary market for Treasuries.
- Treasuries are government bonds issued by the U.S. federal government, and are often considered to be among the safest assets available.
Go-around describes the Federal Reserve’s strategy for achieving the highest possible returns on U.S. government securities it buys and sells in financial markets. The government keeps a list of banks, broker-dealers, and other financial institutions which have been approved to enter into deals with the Federal Reserve. These institutions or firms, known as primary dealers, allow the Federal Reserve to purchase and sell securities on the secondary market. Primary dealers act like market makers for federal treasury securities, buying them in huge volumes at auction and then redistributing or selling them.
The Federal Reserve’s sales and purchases of U.S. treasury bills, notes, bonds, and other government securities all serve the Federal Reserve’s monetary policy implementation. The Federal Reserve Bank of New York’s Open Market Desk executes the sales and purchases in order to control the amount of liquidity in the economy. The Fed makes purchases to increase the amount of money available to the banking system and the economy and makes sales to reduce that supply and curb lending. All of these operations aim to move the federal funds rate, which is the interest rate banks charge for interbank lending.
By using an auction process for its open market operations, the Federal Reserve ensures it does business on the best possible terms, since its pool of pre-qualified primary dealers must bid against one another for each opportunity.
Primary and Secondary Markets for Treasury Securities
Although primary dealers purchase the vast majority of treasury securities directly from the government and then trade them in secondary markets, anyone can bid on original issuances through the U.S. Treasury Department’s TreasuryDirect website. By contrast, primary dealers bid on contracts to buy or purchase government securities on the secondary market as a counterparty to the Federal Reserve.
Go Around and Monetary Policy
The Federal Reserve’s open market operations represent the most influential of the three methods employed to drive monetary policy. The others include setting the discount rate that banks pay for the short-term loans they receive from the Federal Reserve Bank, which signals the Fed’s intentions for upcoming changes to its monetary policy by giving the markets an idea of potential changes to the federal funds rate target.
The Federal Reserve also sets requirements for the number of capital banks must hold on hand to satisfy potential withdrawals. Reserve requirements amount to a percentage of the bank’s overall deposits, with tiered requirement thresholds. Reductions in reserve requirements boost the amount of money in circulation, while increased reserve requirements force banks to take liquidity out of the system and hold it in reserve.
How Does the Fed Enact Contractionary Monetary Policy and Expansionary Monetary Policy?
The Fed sets monetary policy in reaction to the economy and its outlook. Expansionary policy is done to stimulate the economy in times of recession. These measures can include lowering interest rates and increasing OMO activities to buy securities in the market. Contractionary policy is done to cool down an overheated economy, and would entail the opposite measures of an expansionary policy.
What Are the Main Tools of Monetary Policy?
The main tools a central bank has for monetary policy are:
- setting target interest rates (the Fed funds rate)
- setting the discount rate
- open market operations (OMO)
- setting bank reserve requirements
What Is the Difference Between Open Market Operations and Quantitative Easing?
Quantitative easing (QE) is similar to open market operations (OMO), but expands the types and maturities of securities the Fed can purchase for its balance sheet. For example, with OMO the Fed typically buys short- and mid-term Treasuries. With QE it may buy very long-dated Treasuries along with non-Treasury securities. The goal is to inject more money into the economy while at the same time stabilizing certain bond or other markets as a steady buyer.