Open Market Committee

The money supply is controlled by the Open Market Committee of the Federal reserve system, the FOMC. This body is called the "open market committee" because it buys and sells government bonds on the open market. This open market activity influences the supply of bank reserves and thus the money supply.

Suppose that the board of governors of the Federal Reserve System has decided to increase the money supply. Here is how the FOMC would carry out that policy:

  1. The FOMC buys bonds.
  2. It pays for the bonds with a check on the Fed.
  3. The check is an addition to bank reserves.
  4. With more reserves, banks create more money.

For example, suppose the FOMC buys a $1000 bond from Jane Roe, and gives Jane a check on the Federal Reserve Bank of New York in return for the bond. Jane makes a deposit in her bank, First National of Enumclaw. First National will then deposit the check in the Fed (actually in the Federal Reserve Bank of San Francisco, which serves Enumclaw) and thus First National's reserves are increased. This increase in reserves leads to more loans and a multiple increase in the supply of money, in the same way as the example we just looked at.


Next:Cutting the Money Supply
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