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The Fed’s purpose in buying and selling the securities is to have an effect on the federal funds rate, the speed at which banks borrow reserves from one another. When the Fed wants to increase reserves, it buys securities and pays for them by making a deposit to the account maintained at the Fed by the primary dealer’s bank. When the Fed wants to reduce reserves, it sells securities and collects from those accounts. Most days, the Fed doesn’t wish to improve or decrease reserves permanently so it normally engages in transactions reversed within a day or two. That signifies that a reserve injection as we speak might be withdrawn tomorrow morning, only to be renewed at some stage several hours later. These brief-term transactions are known as repurchase agreements (repos)‍—‌the vendor sells the Fed a safety and agrees to purchase it back at a later date.

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