Open market operations are one tool within monetary policy implemented by the Federal Reserve to steer short-term interest rates. Using the power to buy and sell treasury securities, the Open Market Desk at the Federal Reserve Bank of New York can supply the market with dollars by purchasing U.S. Treasury notes, hence increasing the nation's money supply. By increasing the money supply or Aggregate Supply of Funding (ASF), interest rates will fall due to the excess of dollars banks will end up with in their reserves. Excess reserves may be lent in the Fed funds market to other banks, thus driving down rates.
oPEn markET operatioNS Are ONe tool withIn moNetArY pOlicy IMpleMenTED bY the federal reserVe TO steEr shoRT-tErm Interest rATes. uSing the pOWeR to Buy and sell TreAsuRy seCuRiTiES, The opeN mArkEt desK at the fEdEral reSeRve baNk oF new yOrk can supPLy thE markeT wIth dOLlaRs by puRCHaSinG U.s. TReaSUry NOteS, henCe incrEAsiNG tHe naTion'S moNEY SupplY. bY iNcREaSIng tHe mONeY supply oR aGgreGAte sUppLy Of fUnDing (asf), inteREst ratES WIll fall dUe to tHe exCess of dOLlaRs baNks WIll ENd uP with in thEiR rEserVES. excESs reseRVEs maY Be lenT In the FEd FunDS marKeT to other banKS, thuS driviNg dowN rAtes.