Open Market Operations

[Minder]

What are the Fed's Open Market Operations ?

How do Temporary Open Market Operations (http://www.ny.frb.org/markets/omo/dmm/temp.cfm) effect the market ?

I have a vague understanding of what this is and how it works, I would like to know if anyone else regards this as important in it's effects on the markets ?

I have used this (http://www.omo.co.nz/) site to try and further my understanding.

Chart here (http://www.bullandbearwise.com/FOMOOutChart.asp) showing the increase in TOMO this year.

I don't know much about this subject.

Are these what is referred to as coupon passes ?

Is there a limit to the amount to repo money that can be made available each month ?

Am I correct in believing that these agreements expire in days ? ($20b auctioned yesterday, 05th July for repayment tomorrow, 07th July ?)

What sort of interest rate is paid ? The rates quoted on the Frb NY site average 3% to 4%, is that per annum or for the duration of the agreement ?

Sorry, lots of questions, I don't expect anyone to reel off the answers, I would be grateful for a pointer to any site where I can research this topic.

Thanks

[Emc2]

you got me interested

I pulled this much from financial dictionaries online:

Federal Open Market Committee: A 12-member committee which sets credit (http://www.investorwords.com/1193/credit.html) and interest rate (http://www.investorwords.com/2539/interest_rate.html) policies for the Federal Reserve System. This committee consists of 7 members of the Board of Governors, and 5 of the 12 Federal Reserve Bank (http://www.investorwords.com/1909/Federal_Reserve_Bank.html) Presidents. This group, headed by the Chairman of the Federal Reserve Board, sets interest rates either directly (by changing the discount rate (http://www.investorwords.com/1478/discount_rate.html)) or through the use of open market operations (http://www.investorwords.com/3447/open_market_operations.html) (by buying and selling government securities (http://www.investorwords.com/5954/securities.html) which affects the federal funds rate). The discount rate is the rate at which the Federal Reserve Bank charges member banks for overnight loans. The Fed actually controls this rate directly, but it tends to have little impact on the activities of banks because these funds are available elsewhere. This rate is set during the FOMC meetings by the regional banks and the Federal Reserve Board. The federal funds rate is the interest rate at which banks loan excess reserves to each other. While the Fed can't directly affect this rate, it effectively controls it through the way it buys and sells Treasuries to banks. There are 8 scheduled FOMC meetings during the course of each year. However, when circumstances dictate, the Fed can make inter-meeting rate changes.

Sterilization: To use open market (http://www.investorwords.com/3446/open_market.html) operations to counteract the effects of exchange market intervention on a country's monetary base.

A method of sterilization carried out by a country's federal reserve or central bank to counteract the effects of exchange-market interventions on domestic money supplies by offsetting the purchases or sales of domestic assets.

Sterilized intervention is a way for a country to alter its debt composition without affecting its monetary base. It is used as a tool to counter undesirable exchange-rate movements.

Exchange Rate: The price of one country's currency expressed in another country's currency. In other words, the rate at which one currency can be exchanged for another.

-Emc2

:ridinghor

[wulfgar60]

At a basic level "open market operations" is a fancy term for printing money.
We could grasp the fundamentals of banking. Those with savings, lending money to those wishing to purchase. Of course for every dollar lent, there should be a saver to create the deposit. The balance beween lending and savings is achieved by the required interest rate.
However governments prefer to keep the interest rate too low. This means an excess of borrowers to savers. Normally the banks would empty of funds and close their doors.
Central Banks will get around this by printing the savings from thin air, and finally having them deposited in the banking system.
This can be done a number of ways. A CB like the Fed may purchase government treasuries, simply lending vast amounts of newly created currency to the government. This is of course inflationary so the governments oringinal debt gradually becomes meaningless. Later the government borrows even more money.
Another aspect is the purchase of "bills". The government not having the cash to pay their out goings, waiting on taxation income. Will sell the bill to the Fed. Who will collect the government income at a later stage. Of course at the later stage, the governemnt coffers are again empty, so they borrow more new money.
This is not good for savers who earned dollars with sweat and blood. Because they find themselves having to compete with the Fed's "funnymoney".

[azxcvbnm321]

The FED does indeed create more money by open market transactions. When the FED buys a bond, or some other security, from a bank, the FED gives the bank Federal Reserve Notes (by crediting the bank's account on computer, yes they have unlimited ability to do this), and the bank gives the FED, let's say an US bond.

Since the FED doesn't collect interest from the US Government, and is considered a government agency, what has happened is that US Government debt has just been switched for Federal Reserve Notes. This is called monetizing the debt. It may sound strange, but remember that the word "Note" stood for a promise to pay in earlier times (and still does). Federal Reserve Notes are the debt of the government. The government must have debt or else there would be no notes (a promise to pay).

The repurchase rates and such apply to interbank transactions, not between the FED and the bank. The FED doesn't issue securities, it just buys and sells US government securities that are issued by the US Treasury or other Agency (like GNMA). All the interest income the FED receives from holding these securities is returned to the US Treasury, so in effect the FED doesn't collect interest from the US Government.

This is important as the money supply effects inflation and also confidence. The reason the FED doesn't just buy all the US Govt. bonds out there is that the economy would be flooded with Federal Reserve Notes and people would lose confidence. People's confidence is what gives the dollar value, that's why the FED seems so tough on inflation, because inflation erodes the dollar's value and thus confidence.

[bigjon]

The FED does indeed create more money by open market transactions. When the FED buys a bond, or some other security, from a bank, the FED gives the bank Federal Reserve Notes (by crediting the bank's account on computer, yes they have unlimited ability to do this), and the bank gives the FED, let's say an US bond.

Since the FED doesn't collect interest from the US Government, and is considered a government agency, what has happened is that US Government debt has just been switched for Federal Reserve Notes. This is called monetizing the debt. It may sound strange, but remember that the word "Note" stood for a promise to pay in earlier times (and still does). Federal Reserve Notes are the debt of the government. The government must have debt or else there would be no notes (a promise to pay).

The repurchase rates and such apply to interbank transactions, not between the FED and the bank. The FED doesn't issue securities, it just buys and sells US government securities that are issued by the US Treasury or other Agency (like GNMA). All the interest income the FED receives from holding these securities is returned to the US Treasury, so in effect the FED doesn't collect interest from the US Government.

This is important as the money supply effects inflation and also confidence. The reason the FED doesn't just buy all the US Govt. bonds out there is that the economy would be flooded with Federal Reserve Notes and people would lose confidence. People's confidence is what gives the dollar value, that's why the FED seems so tough on inflation, because inflation erodes the dollar's value and thus confidence.

The Fed would like YOU to believe that, only the ignorant fall for their con game.

They claim they are a non-profit corporation, yet they hold themselves above the law and have consistently never allowed an independent audit of their operations.

[bigjon]

What are the Fed's Open Market Operations ?

How do Temporary Open Market Operations (http://www.ny.frb.org/markets/omo/dmm/temp.cfm) effect the market ?

I have a vague understanding of what this is and how it works, I would like to know if anyone else regards this as important in it's effects on the markets ?

I have used this (http://www.omo.co.nz/) site to try and further my understanding.

Chart here (http://www.bullandbearwise.com/FOMOOutChart.asp) showing the increase in TOMO this year.

I don't know much about this subject.

Are these what is referred to as coupon passes ?

Is there a limit to the amount to repo money that can be made available each month ?

Am I correct in believing that these agreements expire in days ? ($20b auctioned yesterday, 05th July for repayment tomorrow, 07th July ?)

What sort of interest rate is paid ? The rates quoted on the Frb NY site average 3% to 4%, is that per annum or for the duration of the agreement ?

Sorry, lots of questions, I don't expect anyone to reel off the answers, I would be grateful for a pointer to any site where I can research this topic.

Thanks

Thanks for the links, I too have been curious about repo's and reverse repo's. I would have to guess, but from what I have surmised a repo is an injection of cash into the member banks and an increase in liquidity, and the reverse repo unwinds it. Knowledgable people indicate that the increased cash boosts the stock market.

I'm going to have to wait until G. Edward writes another book and explains it.:albertein

[wulfgar60]

I've been striving to understand the mysteries of Central Banking. My only guess is a repo is sort of non negociable bill. It's use surrounds money constantly interchanged between the CB and the institution, rather than anything that would become outstanding.

[azxcvbnm321]

If you are talking about Repurchase Agreements (REPO's), those are a contract to rebuy a security you have "sold" (lent out in reality) for a certain amout of money. Let's say someone wants to invest $500,000,000 but for only one or two days (he's just wants to park that money someplace safe and still earn interest). Since there are no Govt. securities for that short of a time, you can give him a REPO, where you sell him 30 day Treasury Bills and agree to buy them back in a day or two, giving him interest at whatever rate you agree on. You then get the money and find a way to "invest" that money yourself to get a better rate, that will hopefully cover the interest you are paying the other guy.

I don't understand very much, but supposedly money never sleeps in this global system. One day's interest on billions can add up so what people do is lend out their money before market close, in each local market. New York closes at 4PM Eastern (don't know when the bond markets close) and the money moves to Vancouver. Vancouver closes and Tokyo, Hong Kong, and Shanghai open. Those markets close and Frankfurt opens, followed by London. London closes, and New York opens starting everything over again.

Money flows around the world like this, wish I knew all the details, but money is being constantly put to use, and is never idle.