Open market operations are the Federal Reserve’s main tool for steering interest rates and controlling how much money flows through the banking system. The Fed buys or sells U.S. Treasury securities, and sometimes agency mortgage-backed securities, to push the federal funds rate toward a target the Federal Open Market Committee sets at each of its meetings. As of early 2026, that target sits at 3.50 to 3.75 percent.1Federal Reserve Board. The Fed Explained – Accessible Version Those transactions ripple outward into what you pay on a mortgage, what you earn on savings, and how easily businesses can borrow.
Who Decides and Who Executes the Trades
Two groups run the process. The Federal Open Market Committee, or FOMC, decides where rates should be. It has twelve voting members: the seven governors of the Federal Reserve Board plus five rotating presidents of regional Reserve Banks. The committee meets eight times a year and votes on a target range for the federal funds rate.2Federal Reserve. Federal Open Market Committee Meeting Calendars and Information
Once the target is set, the actual buying and selling happens at the Federal Reserve Bank of New York. A team called the Open Market Trading Desk carries out the transactions with a group of roughly two dozen approved counterparties known as primary dealers.3Federal Reserve Bank of New York. Permanent Open Market Operations No other Reserve Bank can run open market operations on its own. Every trade flows through New York under FOMC direction.4Federal Reserve Board. Federal Reserve Act Section 12A – Federal Open Market Committee Primary dealers are the only firms that trade directly with the Fed in these operations, and they are required to participate consistently and make markets when the New York Fed transacts for foreign central banks and other official account holders.5Federal Reserve Bank of New York. Primary Dealers List
How Buying and Selling Changes the Money Supply
The mechanics are simpler than they sound. When the Fed buys a Treasury security from a primary dealer, it pays by crediting that dealer’s bank with new reserve balances. The money did not exist before the transaction. The Fed creates it electronically. The bank’s reserves grow, and it now has more cash on hand to lend.
Selling reverses the process. The purchasing bank’s reserve account is debited, and that money effectively disappears from the banking system.
The initial injection is only the starting point. Once a bank has extra reserves, it lends a portion and keeps the rest to meet regulatory requirements. The borrower spends the funds, the recipient deposits them in another bank, that bank lends again, and each round creates new deposits. A single Fed purchase expands the total money supply by a multiple of the original amount. Economists call this the money multiplier. The size of the multiplier varies with how willing banks are to lend and how much cash people keep outside the banking system.
How This Steers the Federal Funds Rate
The federal funds rate is what banks charge each other for overnight loans of reserves. It is the benchmark that shapes nearly every other interest rate. Before 2008, the Fed kept reserves relatively scarce and adjusted the supply each day through open market operations to nudge the rate up or down.
That approach changed after the 2008 crisis. Large-scale asset purchases flooded the banking system with trillions in reserves, and fine-tuning a small reserve supply no longer worked. The Fed shifted to what it calls an ample reserves framework. Reserves are plentiful enough that banks do not need to compete aggressively to borrow them overnight, so the Fed steers rates using administered rates instead of daily reserve tweaks.6Federal Reserve Board. Interest on Reserve Balances (IORB) Frequently Asked Questions
The main lever is the Interest on Reserve Balances rate, or IORB, which is what the Fed pays banks on cash they leave overnight at the central bank. Banks have little reason to lend reserves to another bank for less than they can earn parking them at the Fed. As of early 2026, IORB is 3.65 percent, inside the FOMC’s 3.50 to 3.75 percent range.7Federal Reserve Board. Interest on Reserve Balances When the FOMC moves its target, the Board of Governors adjusts IORB by the same amount.6Federal Reserve Board. Interest on Reserve Balances (IORB) Frequently Asked Questions
Not every overnight lender is a bank eligible for IORB. Money market funds, government-sponsored enterprises, and other nonbank participants need a different anchor. The Overnight Reverse Repurchase Agreement facility, or ON RRP, lets these institutions place cash with the Fed overnight at a set rate, currently 3.50 percent. No institution will lend to a private counterparty for less than the Fed guarantees, so ON RRP puts a floor under short-term rates.8Federal Reserve Bank of New York. How the Fed’s Overnight Reverse Repo Facility Works IORB on top, ON RRP underneath. The federal funds rate lives in between.
Permanent and Temporary Operations
The Trading Desk runs two kinds of transactions. Permanent operations are outright purchases or sales that change the size of the Fed’s portfolio for the long term. As the economy grows, demand for currency and reserves grows with it, and permanent purchases accommodate that expansion. The Desk currently conducts regular purchases of Treasury bills, and if needed other Treasuries with three years or less to maturity, to maintain ample reserves.9Federal Reserve Bank of New York. Treasury Securities Operational Details These reserve management purchases, which began in December 2025 after the Fed finished shrinking its balance sheet, are capped at $40 billion per month.10U.S. Department of the Treasury. Report to the Secretary of the Treasury from the Treasury Borrowing Advisory Committee
Temporary operations address short-lived swings in reserve demand, like tax deadlines or quarter-end cash crunches. A repurchase agreement, or repo, works like a short-term collateralized loan: the Fed buys securities from a dealer with an agreement that the dealer will buy them back at a set price, often the next day. Reserves flow in immediately and drain out when the agreement matures. A reverse repo does the opposite. These tools smooth day-to-day volatility without changing the Fed’s long-term holdings.
Quantitative Easing and Quantitative Tightening
Routine open market operations are modest. Quantitative easing, or QE, is the same tool used at a very different scale. The Fed turns to QE when it has already cut the federal funds rate to near zero and needs more firepower to stimulate the economy. Instead of buying short-term bills to manage reserves, it purchases large quantities of longer-term Treasuries and mortgage-backed securities specifically to push down long-term interest rates.11Federal Reserve. The Fed Explained – Monetary Policy
The Fed first used QE during the 2008 crisis and expanded it in several rounds, growing its balance sheet from under $1 trillion to about $4.5 trillion by October 2014.12Federal Reserve Board. Open Market Operations Another round followed during the pandemic in 2020, pushing assets higher still. Quantitative tightening, or QT, is the reversal. The Fed lets maturing securities roll off without replacing them, gradually shrinking the balance sheet. The most recent round of QT began in June 2022 and concluded on December 1, 2025.13Board of Governors of the Federal Reserve System. The Central Bank Balance-Sheet Trilemma As of early 2026, the Fed’s total assets are roughly $6.6 trillion.
What the Fed Is Allowed to Buy and Sell
Federal law limits what the Fed trades. Section 14 of the Federal Reserve Act authorizes purchases and sales of bonds and notes of the United States, meaning Treasury securities, with no maturity restrictions, as long as the transactions happen in the open market.14Federal Reserve Board. Federal Reserve Act Section 14 – Open-Market Operations The statute also authorizes trading in obligations that are direct obligations of, or fully guaranteed by, a federal agency. That second category is what lets the Fed buy and sell agency debt and agency mortgage-backed securities issued or guaranteed by entities like Fannie Mae and Freddie Mac.15eCFR. 12 CFR 270.4 – Transactions in Obligations
In practice, the Trading Desk concentrates on Treasury securities because of their deep liquidity and zero credit risk. Current operational guidelines exclude securities with four weeks or less remaining to maturity and focus purchases on bills and shorter notes.9Federal Reserve Bank of New York. Treasury Securities Operational Details Agency mortgage-backed securities play a larger role during QE, when the Fed specifically targets housing to bring mortgage rates down.3Federal Reserve Bank of New York. Permanent Open Market Operations
How Open Market Operations Reach Your Wallet
Everything the Fed does through open market operations eventually shows up in the interest rates you actually pay and earn. The transmission is not always immediate, and it is not symmetrical.
Credit card rates are the most directly connected. Most variable-rate cards are pegged to the prime rate, which moves almost in lockstep with the federal funds rate. When the Fed raises rates, credit card APRs climb quickly. When the Fed cuts, card issuers tend to lower rates slowly and in small increments, if at all.
Mortgage rates follow a looser link. Short-term adjustable-rate mortgages track the federal funds rate more closely, but the 30-year fixed rate is driven mainly by long-term Treasury yields, investor demand, and inflation expectations. The Fed can influence long-term rates through QE programs that buy mortgage-backed securities, and the effect during 2020 and 2021 was pronounced, but ordinary daily open market operations mostly move the short end of the curve.12Federal Reserve Board. Open Market Operations
Savings accounts and CDs move in the same direction as the federal funds rate, since banks set deposit rates partly based on what they can earn on reserves and short-term lending. When the Fed pushes rates up, high-yield savings rates tend to follow, though the speed varies by institution. When rates fall, banks are often quicker to cut what they pay depositors than what they charge borrowers.