Segment 406: Open Market Operations - To turn its monetary policy decisions into action, the Federal Reserve has a number of monetary policy tools. The most frequently used tool in ordinary times is called open market operations. That refers to buying and selling US Treasury and sometimes federal agency securities in order to influence a short term interest rate known as the Federal Funds Rate. Let's see how those operations work. When the Fed buys securities on the open market, it credits the newly created funds to the dealers banks. The banks now have more money to lend out, which tends to push down the Federal Funds Rate. The lower Federal Funds Rate will likely cause other interest rates in the economy to fall. Short term interest rates may stimulate consumers and businesses to borrow and spend more. Employment and economic growth are likely to increase. But inflation may also rise. On the other hand, when the Fed sells securities, it has the opposite effect, reducing the amount of funds banks have to lend and driving interest rates upward. Increased short term interest rates may cause consumers and businesses to borrow and spend less. Inflation will likely decline, but employment and economic growth may also decrease. Karin Kimbrough (Assistant Vice President, Markets Group, Federal Reserve Bank of New York): Open market operations are conducted in the New York Fed's market group by the open markets trading desk. On that desk, traders will buy and sell US treasury securities to try to achieve a target rate that has been set by the FOMC. The FOMC sets this target rate every six weeks at an FOMC meeting and delivers a directive to the head of the markets group at the New York Fed, instructing him to achieve his target rate. We achieve this target rate through the buying and selling of US securities, and hopefully influencing the supply and demand of reserve balances throughout the system.