What are Permanent Open Market Operations (POMO)?

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 Do Permanent Open Market Operations (POMO) Work?

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 Do Permanent Open Market Operations (POMO) Matter?

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.

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Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

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