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Strategies & Market Trends : Buy and Sell Signals, and Other Market Perspectives

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Nov 7 4:00 PM EST

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To: GROUND ZERO™ who wrote (9909)	9/13/2010 11:03:42 PM
From: Copeland	Read Replies (1) of 218591

POMO stands for the Federal Reserve Permanent Open Market Operations. It's the way the Fed pumps the equities market. The Fed buys a certain amount of securities from one or more of its primary dealers (the too big to fail banks -- Barclays, Goldman, Deutsche Bank, JPM, Morgan Stanley, et al). The securities can be anything, like MBSes, but recently it's been treasuries. When the Fed buys bonds from one or more of these dealers, it's expected that the banks involve immediately "reinvest" the cash, usually into the equities market. As a result, equities tend to spike on days when all this liquidity magically appears. Here's the more "official" explanation: Federal Reserve Permanent Open Market Operations. newyorkfed.org Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy. Historically, the Federal Reserve has used OMOs to adjust the supply of reserve balances so as to keep the federal funds rate around the target federal funds rate established by the Federal Open Market Committee (FOMC). OMOs are conducted by the Trading Desk at the Federal Reserve Bank of New York. The range of securities that the Federal Reserve is authorized to purchase and sell is relatively limited. The authority to conduct OMOs is found in section 14 of the Federal Reserve Act. OMOs can be divided into two types: permanent and temporary. Permanent OMOs are generally used to accommodate the longer-term factors driving the expansion of the Federal Reserve's balance sheet--primarily the trend growth of currency in circulation. Permanent OMOs involve outright purchases or sales of securities for the System Open Market Account, the Federal Reserve's portfolio. Temporary OMOs are typically used to address reserve needs that are deemed to be transitory in nature. These operations are either repurchase agreements (repos) or reverse repurchase agreements (reverse repos). Under a repo, the Trading Desk buys a security under an agreement to resell that security in the future. A repo is the economic equivalent to a collateralized loan, in which the difference between the purchase and sale prices reflects interest.

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