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Permanent Open Market Operations POMO

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Definition of 'Permanent Open Market Operations POMO'

POMO is an acronym for Permanent Open Market Operations.

POMO is the purchase or sale of Treasury securities on an outright basis adds or drains reserves available in the banking system. Such transactions are arranged on a routine basis to offset other changes in the Federal Reserve’s balance sheet in conjunction with efforts to maintain conditions in the market for reserves consistent with the federal funds target rate set by the Federal Open Market Committee (FOMC).

Open market operation is the means of implementing monetary policy by which a central bank controls the short term interest rate and the supply of base money in an economy, and thus indirectly the total money supply. This involves meeting the demand of base money at the target rate by buying and selling government securities, or other financial instruments. Monetary targets such as inflation, interest rates or exchange rates are used to guide this implementation.

When there is an increased demand for base money, action is taken in order to maintain the short term interest rate (that is, to increase the supply of base money). The central bank goes to the open market to buy a financial asset such as government bonds, foreign currency or gold. To pay for this, bank reserves in the form of new base money (for example newly printed cash) is transferred to the sellers bank, and the sellers account is credited. Thus, the total amount of base money in the economy has increased. Conversely, if the central bank sells these assets in the open market, the amount of base money that the buyer's bank holds decreases, effectively destroying base money.

Since most money is now in the form of electronic records rather than cash, open market operations are conducted simply by electronically increasing or decreasing ('crediting' or 'debiting') the amount of base money that the bank has in its reserve account at the central bank. Thus, the process does not literally require new currency. (However, this will increase the central bank's requirement to print currency when the member bank demands banknotes, in exchange for a decrease in its electronic balance.)

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