OMO
Open market operations (OMOs) are a primary monetary policy tool where a central bank (e.g., the Federal Reserve) buys or sells government securities in the open market to regulate the money supply and influence interest rates.
Buying securities injects liquidity (money) into the banking system to lower interest rates and boost economic activity.
Selling securities absorbs liquidity to raise interest rates and curb inflation.
Key Aspects of Open Market Operations:
Purpose: To manage liquidity, influence the cost of credit, and achieve monetary policy targets like inflation and employment.
Mechanism: When the central bank buys securities from commercial banks, it increases the reserves banks have, encouraging lending. Conversely, selling securities reduces bank reserves, tightening credit.
Target Rates: These operations are used to keep short-term interest rates (such as the Federal Reserve Board's federal funds rate or the Reserve Bank of Australia's cash rate) near a specific target.
Types:
Permanent (POMO): Long-term purchases/sales to manage structural liquidity.
Temporary: Often in the form of repurchase agreements (repos) to handle short-term fluctuations.
Evolution: Since the 2008 financial crisis, many central banks have used large-scale, long-term asset purchases (quantitative easing) rather than just small, daily operations.
Quantitative Easing (QE)
Open Market Operations (OMO) and Quantitative Easing (QE) are both central bank tools to manage the money supply, but differ significantly in scale and intent. OMOs are routine, small-scale purchases of short-term bonds to target interest rates. QE is an emergency, large-scale, pre-announced buying of long-term, riskier assets (e.g., mortgage-backed securities) used when interest rates are near zero.
OMOs manage liquidity and short-term interest rates. QE aims to lower long-term interest rates, boost asset prices, and spur lending when conventional policy is exhausted.
Asset Type: OMOs typically involve short-term government securities. QE involves long-term government debt and, in some cases, private assets or corporate bonds.QE is an unconventional, non-traditional tool typically utilized during severe economic crises (e.g., 2008 financial crisis, COVID-19 pandemic)
Mechanism:
Quantitative easing (QE) is an unconventional monetary policy where central banks (e.g., The Federal Reserve, Bank of England) create new digital money to purchase long-term securities, such as government bonds, from commercial banks. This injects liquidity into the financial system, lowers long-term interest rates, and encourages lending and investment to stimulate economic activity.
It's really the modern version of printing money...… it has the negative effect of debasing the value of the currency.
Modern implications.
The devaluing of the USD. Debasement.
Rise of crypto
Movement to other "safer currencies"
Movement into hard assets.... Gold, silver, property, equities.
The BRICS have launched a gold backed currency … the "UNIT" and central banks around the world are buying gold.
