the purchase of government securities from the public by the fed will cause This is a topic that many people are looking for. accountabilitynowpac.com is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, accountabilitynowpac.com would like to introduce to you Fed Open Market Operations . Following along are instructions in the video below:
” s say we have two banks bank. A and bank b. And you might already already know that banks all banks lend out the great majority of the money that get in as deposits. But they keep some of the money as reserves one just in case their depositor comes.
And hey can i have some of my money back and two because the central bank. The federal reserve says you have to keep a certain amount of your deposits in reserve there is a reserve requirement. But you can imagine over the course of doing transactions. Thousands of transactions.
A day millions maybe maybe bank b. More of its depositors come by and say hey give me some of my deposits back. Obviously. He s lent out a lot of that money and so he starts running low on reserves.
Maybe bank a the depositors haven t asked for the money or for whatever. Reason bank. A is sitting on a lot of cash in this situation..
What you re going to have happen is bank. A is going to lend some reserves is going to lend some cash to bank b. This is lending. Some cash and they ll charge an interest rate for lending that cash maybe it will be 5 interest and that won t be 5 per day and usually these loans are on a per day basis.
And then the next day it ll be renegotiated on a per day basis. But it s not 5 per day it ll be 5 per year. So it will be a much smaller fraction. But usually as i mentioned this lending takes place on a per day basis.
We ll say hey this is your cash for just tonight. If you need it for the next night. We ll talk again and maybe it will be another 5 or maybe the interest rate can change again let s say. The federal reserve is sitting over here and for whatever reason wants to stimulate the economy.
This is the fed and they want to stimulate the economy so they start printing some money i should do money in green. The federal reserve here they re starting to print some money and they want to do two things they want to inject this money into the banking system. Which essentially hopefully will find its way into the economy..
And they also want to lower the interest rate especially the short term interest rate this overnight borrowing. Remember. This is the annual interest rate. But this is an overnight loan overnight loan.
When i talk about the short term interest rate. I m talking about the interest rate on loans that are made over very short periods of time what the federal reserve will do is what s called open market operations they will go to the market and maybe directly to these banks or some other banks and they will buy treasuries they will give this money to the market and in exchange they will usually buy treasury securities sometimes something slightly different but usually very safe securities and maybe it s temporarily buy i ll take about repurchase agreements in the future. What happens is that this cash goes in the hands of the people who just sold the treasury securities and they have to deposit it in banks they might deposit it in this bank over here they might deposit it in this bank over here or other banks. But the net net effect is that there s more cash now in the banking system.
If there s more cash in the banking system. This guy right over here needs less this guy needs less cash. So it lowers demand. It lowers the demand for cash.
And then this guy has more to give so it raises supply raises the supply because some people maybe just took some of this cash and deposited with them. If it raises the supply of cash and this guy needs it less. Then the rate to borrow this cash is going to go down maybe instead of 5 it..
s goes down to 4 . What that would do is it would lower the short term of the yield curve. The short end of the yield. Curve.
Let me. Draw. A yield. Curve.
Right over. Here. This is maturity on this axis maturity. And this is yield.
Let s say. The yield curve before looked like this. Let s say it looked like this where this right over..
Here is 5. And this overnight overnight this might be yield on. I don t know one year debt. This might be yield on.
I don t know maybe. It s five year debt whatever i could keep going. But by doing this open market operation. The fed was able to do both of its goals.
It was able to inject cash printed cash into the economy. And it s also able to lower the interest rate it. Took it from being 5 to down to 4 . Now because of this open market operation.
The fed the yield curve might start to look something like that ” ..
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Fed Open Market Operations
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