This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Open Market Operations Definition

Dictionary of Financial Terms

Open market operations are what the Fed does to keep the fed funds rate close to the target set by the Federal Open Market Committee. The fed funds rate is the rate at which banks lend to each other overnight, and the Fed keeps it on target by supplying as much liquidity as there is demand for at the target rate. If the Fed failed to supply enough liquidity, the fed funds rate -- the cost of money -- would rise as the supply fell. Conversely, if the Fed supplied too much liquidity, the fed funds rate would fall as supply outstripped demand.

The open market operations by which the Fed supplies liquidity to the banking system are purchases from and sales to dealers of Treasury and other debt securities. It works this way: When the Fed buys securities from a dealer, the dealer's bank see its reserves increase by the amount the Fed paid for the securities.

Open market operations are either permanent or temporary. The Fed buys or sells securities on a permanent, or outright, basis, when its forecasts indicate that the amount of liquidity in the banking system will continue to need adjustment. It buys or sells them on a temporary basis when a shortage or excess of liquidity in the system is viewed as short-lived.

An outright purchase of Treasury notes or bonds by the Fed is called a coupon pass. A temporary purchase is called a repurchase agreement, since the dealers agree to buy the securities back from the Fed on a certain date. Permanent and temporary sales of securities by the Fed to dealers are much less common than purchases.

Open market operations are conducted by the Fed's Domestic Trading Desk (a.k.a. the Open Market Desk) at the New York Fed.

Definitions of Financial Terms

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free


Chart of I:DJI
DOW 15,973.84 +313.66 2.00%
S&P 500 1,864.78 +35.70 1.95%
NASDAQ 4,337.5120 +70.6750 1.66%
Top Rated Stocks Top Rated Funds Top Rated ETFs