The Conduct of Open Market Operations
The Federal Reserve Bank of
Each day, the Desk must decide whether to
conduct open market operations, and, if so, the types of operations to conduct.
It examines forecasts of the daily supply of Federal Reserve balances from
autonomous factors and discount window lending. The forecasts, which extend
several weeks into the future, assume that the Federal Reserve abstains from
open market operations. These forecasts are compared with projections of the
demand for balances to determine the need for open market operations. The
decision about the types of operations to conduct depends on how long a
deficiency or surplus of Federal Reserve balances is expected to last. If staff
projections indicate that the demand for balances is likely to exceed the supply
of balances by a large amount for a number of weeks or months, the Federal
Reserve may make outright purchases of securities or arrange longer term
repurchase agreements to increase supply. Conversely, if the projections
suggest that demand is likely to fall short of supply, then the Federal Reserve
may sell securities outright or redeem maturing securities to shrink the supply
of balances.
Even after accounting for planned outright
operations or long term repurchase agreements, there may still be a short term
need to alter Federal Reserve balances. In these circumstances, the Desk
assesses whether the federal funds rate is likely to remain near the FOMC’s
target rate in light of the estimated imbalance between supply and demand. If
the funds rate is likely to move away from the target rate, then the Desk will
arrange short term repurchase agreements, which add balances, or reverse
repurchase agreements, which drain balances, to better align the supply of and
demand for balances. If the funds rate is likely to remain close to the target,
then the Desk will not arrange a short term operation. Short term temporary
operations are much more common than outright transactions because daily
fluctuations in autonomous factors or the demand for excess reserve balances
can create a sizable imbalance between the supply of and demand for balances
that might cause the federal funds rate to move significantly away from the
FOMC’s target.