Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Permanent Open Market Operations (POMO)

What it is:

Permanent open market operations (POMO) are used by the Federal Reserve to either add to or drain the capital reserves available in the banking system.

How it works (Example):

If the Federal Reserve wants to increase the amount of capital available to the banking system, it will buy Treasury securities from banks in exchange for Federal Reserve Notes (aka, cash dollars). Theoretically, the banking system will then inject cash into the economy through loans.

Conversely, if the Federal Reserve wants to decrease the amount of capital avaiable to the banking system, it will sell Treasury securities to banks. This removes cash from the economy.

Why it Matters:

The Federal Reserve uses POMOs as a tool to promote what it sees as "favorable" market conditions. If The Fed is a buyer of Treasury securities, the price of Treasuries goes up and their yield goes down. The yield on Treasury securities is the starting point for interest rates on the vast majority of loans, so if Treasury yields go down, interest rates on loans go down (and vice versa).

The Fed is currently using POMOs to depress interest rates in the hopes an increase in lending will jumpstart the U.S. economy.

Related Terms View All
  • G7 Bond
    The G7 nations include the United States, Canada, the United Kingdom, France, Italy,...
  • Nakahara Prize
    The board of directors of the Japanese Economic Association determines who wins the...
  • Self-Insure
    Let's say John Doe owns a restaurant. He buys property and casualty insurance that only...
  • Vittorio Mincato
    Born in 1936, Mincato is an accountant on paper. His first any only employer was Italian...
  • Take a Flier
    John Doe starts his own business. He looks for angel investors to give him seed capital....