the fed started using open market operations in 1961.
the fed started using open market operations in 1961.
when did the fed start using open market operations?
1961
the federal open market committee action known as operation twist (named for the twist dance craze of the time) began in 1961. the intent was to flatten the yield curve in order to promote capital inflows and strengthen the dollar. the fed utilized open market operations to shorten the maturity of public debt in the open market. it performs the 'twist' by selling some of the short term debt (with three years or less to maturity) it purchased as part of the quantitative easing policy back into the market and using the money received from this to buy longer term government debt. although this action was marginally successful in reducing the spread between long-term maturities and short-term maturities, vincent reinhart and others have suggested it did not continue for a sufficient period of time to be effective. despite being considered a failure since a 1966 near-term analysis by franco modigliani and richard sutch, the action has subsequently been reexamined and in a 2011 paper economist eric swanson of the federal reserve bank of san francisco has suggested that "operation twist" was more effective than originally thought. swanson suggested similar action as an alternative to quantitative easing by central banks; the fomc did in fact take an analogous action in 2011.
history of federal open market committee actions
bullet::::2. "the tools of the federal reserve system": here, friedman discuss the fed’s tools of credit policy and criticizes the controls over margin requirements on security loans, opposes the direct controls on consumer installment credit, and refutes the controls on interest rates on demand and time deposits. then, he discusses the tools of monetary policy arguing that “open market operations alone are a sufficient and efficient tool for monetary policy. rediscounting is an anachronistic survival of an earlier day and an earlier need. variations in reserve requirements... share with rediscounting the property of being a technically poor instrument for controlling the stock of money. both should be eliminated or greatly altered.” in these regards, he explains how open market operations alone can ensure smoother and more precise control of the high-powered money notwithstanding whether monetary policy is implemented via the money stock or the interest rate. friedman gives historical examples in which the discount rate provided misleading signals about the stance of monetary policy. in addition, he argues that the discount rate introduces confusion between the effects of fed on monetary policy and the its effects on the credit markets. in this way, the discount rate diverges the attention from the main task of fed – the control of the stock of money. further on, friedman discusses variations of reserve requirements as a monetary policy tool. he claims that variable required reserves should be eliminated or should be set and kept at fixed level. according to him, the main defect of this tool is that it changes infrequently, which means it has drastic effects on the banks; it is difficult to reverse its changes; it needs to be offset by the open market operations with uncertain effects on the stock of money; and it affects the composition between earning and non-earning bank assets, thus, affecting bank profitability. hence, friedman concludes that open market operations should be "the" monetary policy instrument for several reasons: they are impersonal, they can be used continuously on a day-to-day basis, the operations can be reversed within a day, their amount can be varied, they need not be announced publicly so they do not cause any speculation about their future course, they do not affect bank profitability, they enable fed to determine the amount of high-powered money more precisely, and the link between fed’s actions and the stock of money is more direct and predictable.
a program for monetary stability