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).