Question

How does the Federal Open Market Committee increase the money supply? Why might the Federal Open Market Committee choose to increase the money supply?

Answer 1

The Federal Reserve purchases and sells government securities to manage money supply and interest rates. This practice is called an open market operation The Federal Open Market Committee ( FOMC) sets out monetary policy in the United States, and the Fed's New York trading desk uses free market operations to meet the goals of that strategy. In order to boost the money supply, the Fed must buy bonds from banks that pump liquidity into the financial system. It's going to sell bonds to reduce the money supply.

In a recession or economic downturn, the Fed may try to increase the supply of capital in the economy, with the intention of reducing the rate at which banks lend each other overnight. To do so, the Fed's trading desk must purchase bonds from banks and other financial institutions and deposit them into the buyers' accounts. It raises the amount of liquidity that banks and financial companies have at their disposal, and banks will use these assets to provide loans. With more liquidity on hand, banks would lower interest rates to allow customers and companies to borrow and invest, thus boosting the economy and employment.

If the Fed needs to accelerate or cool economic growth, open market operations are one of its most critical resources. The Fed 's acquisition or selling of securities has ripple effects across money supply, interest rates , economic growth, and jobs.