What occurs when the Federal Open Market Committee (FOMC) purchases securities?

When the Federal Open Market Committee (FOMC) purchases securities, it primarily increases the supply of money in the banking system. This action is a component of what is known as open market operations, which is one of the primary tools used by the FOMC to implement monetary policy.

By buying securities, typically U.S. Treasury bonds, the FOMC injects liquidity into the financial system. The central banks credit the accounts of the commercial banks from which they purchase these securities, thus increasing the reserves of those banks. With more reserves, banks have greater capacity to lend, ultimately leading to an increase in the money supply available for consumers and businesses.

This increase in the money supply can lead to lower interest rates, making borrowing more accessible. However, the direct effect of purchasing securities is the enhancement of the banks' liquidity and subsequently, the expansion of the money supply itself. This mechanism is crucial during economic downturns when stimulating spending and investment is necessary to encourage growth.