Open market operations (OMO) - Financial definition
Concise definition of the term open market operations
Open market operations refer to the buying and selling of government securities by a central bank to regulate the money supply and control interest rates in the economy.
Comprehensive definition of the term open market operations
Open market operations (OMOs) are a key tool used by central banks, such as the Federal Reserve in the United States, to implement monetary policy. By purchasing government bonds, the central bank injects liquidity into the banking system, which can lower interest rates and stimulate economic activity. Conversely, selling government securities withdraws liquidity, potentially raising interest rates and curbing inflation.
For example, during a period of economic recession, a central bank might buy large quantities of government bonds to lower borrowing costs and encourage investment and spending. Conversely, during inflationary periods, it might sell bonds to cool down the economy. These operations are conducted regularly and are essential for maintaining the stability and growth of an economy.