What are open market operations, and what changed after 2008?

Facilities set the edges of the corridor. Open market operations are how a central bank moves the quantity of reserves inside it — and their role has changed more in the last two decades than almost anything else in monetary plumbing.

The mechanics

The central bank transacts with a set of approved counterparties, usually primary dealers:

• It buys securities from a dealer and credits the dealer's bank with reserves. Reserves in the system go up; other things equal, the overnight rate goes down.
• It sells securities, or lends them out against cash, and reserves go down; the overnight rate goes up.

Most day-to-day operations were never outright purchases. They were temporary — done as repurchase agreements, which you will meet properly in the next unit. The central bank lends cash against collateral for one night to add reserves, and the trade unwinds the next morning. A temporary operation is a lever you can pull and unpull daily.

Why they mattered so much, and then stopped mattering as much

Before 2008, US reserve balances were tiny — on the order of tens of billions of dollars. On a base that small, an operation of $10 or $20 billion genuinely moved the overnight rate, and the desk conducted them nearly every morning. Precision came from scarcity.

Then reserves went from tens of billions to trillions. On a $3 trillion base, a $20 billion operation is noise. The quantity dial had become far too blunt to hit a 25 basis point target range, which is precisely why the administered rates from the previous lesson took over the steering.

Open market operations did not disappear; they changed shape. Instead of a discretionary daily fine-tune, the main US operations are now standing facilities available on demand: the overnight reverse repo facility drains cash whenever counterparties want to park it, and the Standing Repo Facility adds cash whenever counterparties want to borrow it. The quantity adjusts itself to demand at a fixed price, rather than the desk guessing the quantity.

Balance sheet runoff is a slow drain, not a rate tool

There is one more quantity lever: letting maturing holdings roll off instead of reinvesting them, commonly called quantitative tightening. It is passive and capped.

A rounded illustration. A central bank sets a runoff cap of $30 billion a month. Over twelve months:

30 × 12 = $360 billion of assets leave the balance sheet — and, all else equal, $360 billion of reserves drain with them.

Note the "all else equal," because it almost never is. As Unit 1 lesson 2 showed, the government's account and the reverse repo facility are moving at the same time, sometimes by more than the runoff. Reserves are a residual of several independent flows, which is why the level surprises people.

This lesson describes how the instruments work. It makes no claim about what any central bank will do with them, and nothing here is a basis for positioning.

Try it now

1. The Fed's target range is published for every calendar day, far more than a page can print. Reduced to the days on which the top of the range changed, from the start of 2022, it is the table below (measured on 28 September 2026). The range was 0.00–0.25% going into 2022. Mark the periods of tightening and easing.

The range as of the latest published day is below; if its top differs from the last row above, the path has moved since this table was measured.

2. Over the same window, SOFR minus the bottom of the target range covers 1,181 business days. Summarised by calendar year (measured 28 September 2026, 2026 running to 25 September), it reads as below. Does the secured overnight rate sit higher inside the range in some periods than others? Set the medians beside the rate path in step 1.

3. Write one sentence explaining, to someone who has never heard the term, why a central bank with trillions of reserves outstanding cannot steer the overnight rate by buying $20 billion of bonds.