Question

When the fed conducts open market purchases

Answer 1

Open market operations can be defined as buying and selling of government bonds by the central bank in the open market. This is generally done with a motive of reducing the money supply in the market.

So, whenever FED believes that the liquidity in the market needs to be reduced it will sell bonds in the market it will increase the interest rates and decrease inflation. When the market is going through disinflation of demand is down Fed will purchase those bonds from the market and release liquidity increasing demand and inflation.

FED uses open market operations as a tool to control liquidity in the market. Whenever market faces inflation or demand is down in the market FED uses OMO to counter that situation.