<P> In the United States, as of 2006, the Federal Reserve sets an interest rate target for the Federal funds (overnight bank reserves) market . When the actual Federal funds rate is higher than the target, the New York Reserve Bank will usually increase the money supply via a repo (effectively borrowing from the dealers' perspective; lending for the Reserve Bank). When the actual Federal funds rate is less than the target, the Bank will usually decrease the money supply via a reverse repo (effectively lending from the dealers' perspective; borrowing for the Reserve Bank). </P> <P> In the U.S., the Federal Reserve most commonly uses overnight repurchase agreements (repos) to temporarily create money, or reverse repos to temporarily destroy money, which offset temporary changes in the level of bank reserves . The Federal Reserve also makes outright purchases and sales of securities through the System Open Market Account (SOMA) with its manager over the Trading Desk at the New York Reserve Bank . The trade of securities in the SOMA changes the balance of bank reserves, which also affects short - term interest rates . The SOMA manager is responsible for trades that result in a short - term interest rate near the target rate set by the Federal Open Market Committee (FOMC), or create money by the outright purchase of securities . More rarely will it permanently destroy money by the outright sale of securities . These trades are made with a group of about 22 banks and bond dealers called primary dealers . </P> <P> Money is created or destroyed by changing the reserve account of the bank with the Federal Reserve . The Federal Reserve has conducted open market operations in this manner since the 1920s, through the Open Market Desk at the Federal Reserve Bank of New York, under the direction of the Federal Open Market Committee . The open market operation is also a means through which inflation can be controlled because when treasury bills are sold to commercial banks these banks can no longer give out loans to the public for the period and therefore money is being reduced from circulation . </P> <P> The European Central Bank has similar mechanisms for their operations; it describes its methods as a four - tiered approach with different goals: beside its main goal of steering and smoothing Eurozone interest rates while managing the liquidity situation in the market the ECB also has the aim of signalling the stance of monetary policy with its operations . </P>

When the federal reserve uses open market operations and sells treasury bonds to banks