Open Market Transactions: the Scope and Frequency of Capital Market Intervention
Fairly specific rules define the type of daily market transactions that the central bank uses to implement monetary policy. These rules are revised for ostensibly technical reasons on an infrequent basis. The changing rules are important constraints on social actors with a stake in monetary policy outcomes. The rules have distinct political consequences which are evident to members of Congress, economists, White House staff, and the members of the FOMC. Central bankers may limit the types of market transactions undertaken in order to impose their own policy goals upon both office holders and agencies that carry and refund outstanding debt, including the Treasury. Central bankers may also choose to broaden market transactions in order to meet specific objectives of elected officials. Changes in the rules governing open market transactions have alternately diminished and expanded the options of elected officials confronted with monetary and economic problems. One goal of FOMC updates to open market procedures is to escape specific statutory direction of open market activity. Decision makers in the Fed have been reluctant to consistently support particular economic sectors through the purchase of particular types of securities. Consistent with decisions to reject selective credit controls and resist reserve requirements on bank assets, members of the Board of Governors and the FOMC are reluctant to use direct purchases of government securities to affect costs of credit and capital for particular classes of borrowers. One exception to this fairly narrow
use of open market transactions is experimentation with purchase of debt issued by the Federal National Mortgage Association (FNMA) in the 1970s.