What Is Permanent Open Market Operations (POMO)
Permanent open market operations (POMO) refers to when a central bank consistently uses the open market to buy and sell securities in order to adjust the money supply. It has been one of the tools used by the Federal Reserve to implement monetary policy and influence the American economy. Open market operations (OMO) are the outright purchases or sales of securities for the system open market account (SOMA), which is the Federal Reserve's portfolio.
- Permanent open market operations (POMO) is when a central bank actively buys and sells treasury bonds in the open market on a continual basis.
- Unlike regular open market operations (OMO), which occur as needed, POMO happens all the time.
- Central banks buy securities in the open market in order to increase money supply, and sell securities to reduce the money supply.
Understanding Permanent Open Market Operations
According to the Federal Reserve, open market operations (OMOs) are the purchases and sale of securities in the marketplace by a central bank. A central bank can give or take liquidity to other banks or groups of banks by buying or selling government bonds. The central bank may also use a secure lending system with a commercial bank. The objective of OMOs is to manipulate the short-term interest rate and the supply of base money in an economy.
When the Federal Reserve buys or sells securities outright, it can permanently add to or drain the reserves available to the U.S. banking system. Permanent open market operations (POMOs) 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.
Open Market Operations
OMOs are one of the three tools used by the Federal Reserve for implementing monetary policy. The other two Fed tools are the discount rate and reserve requirements. Open market operations are conducted by the Federal Open Market Committee (FOMO), while the discount rate and reserve requirements are set by the Federal Reserve's Board of Governors.
OMOs 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 fewer funds to lend, which acts as a brake on economic activity.
Example of POMO
The Federal Open Market Committee (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. This program aimed to help improve conditions in private credit markets after an unprecedented credit crunch gripped global financial markets in 2008 and 2009. It did so by putting downward pressure on longer-term interest rates. In 2018, permanent open market operations (POMOs) were used as a strategy to reinvest principal payments from agency debt.