Open Market Operations - what securities can be included?

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Hi all - ran into this question on the mocks and was tossing up between two answers.
Which of the following is least likely a tool used by the U.S. Federal Reserve Bank to directly influence the level of interest rates?
A. Verbal persuasion
B. Open market operations
C. Setting the rate on 30-year bonds
I guessed that C was the least likely given that verbal persuasion can kind of be a direct influence (I guess?) and that the Fed only sets the overnight rate. The answer was C, which brought up a couple of questions on my end. I get that the Fed doesn’t set the 30-year rate, but in terms of open market operations aren’t treasury securities across all maturities technically available for purchase during open market operations? The Fed could directly/indirectly influence 30-year rates in that case couldn’t it? It’s an unlikely situation, but I can’t find much information on it either way.
Thanks.
 
Here is the CFA-land answer:
30-yr yields don’t really influence any of the metrics we use to assess the health of the economy - which is what they’re there to support. The fed is only concerned with maintaining 2% inflation a year**
Here is the real-land answer: (which really just expands on the other answer)
FOMC operations are focused on the short end of the curve because they’d get taken to pound town if they wanted to play in the bigger sandbox (and I don’t mean pound sterling).
The global bond market is waaaaaaaaaaaaaaay bigger than the Fed - that is where “fed” is measured by what they’re willing to do without incurring reckless amounts of inflation/deflation. Draghi, routinely called on Germany the last year to utilize fiscal stimulus to get any life out of the economy. They don’t get any bang for their buck out of any metrics we use to determine the health of the economy. ISM manufacturing/non-manufacturing isn’t going to be pushed one way or the other because the 30-yr yield fell 20 basis poitns –> why is that? Because banks lend at long time frames, and borrow at short time frames (this means they earn on long time frames and pay out on short ones). Which means, the CONSUMER who earns on the inverse of that at shorter time frames IS going to be influenced to spend/save based upon these shorter time frames.
** truthfully, a 2% inflation target every year is TOTALLY arbitrary and exists purely because in the 80’s the bank of japan sat down and was all like “hey, yo, what should inflation targets be? - 2% shouted Mitsubishi - and 2% they were set” - this is a real conversation that happened and I’m not lying***
*** okay I’m totally lying, but you get the point.
 
You’re correct, the Fed can deal in any Treasury security–and for that matter in any corporate, municipal or mortgage-backed security—as it sees fit. Just consider the trillion+ dollars of agency MBS purchased as part of QE 1, 2, 3 and, nearly, 4(ever). Nonetheless, over most it’s history (i.e. since the 1930s) the Fed normally buys and sells T-bills when conducting open market operations.
The exception of course was in the aftermath of the financial crisis of ’08. The Fed did extensive buying of long-term Treasuries (out to and including the 30-year bond). It did so as part of Operation Twist (selling T-bills and using the proceeds to buy long-term Treasuries in an attempt to “twist” the yield curve—and force long-term rates lower). The Fed did it to an even greater degree as part of the various QEs cited above. At times the Fed was buying $45 billion of long-term Treasuries (and $40 trillion of agency MBS) every month for several years.
Per the issue in the question however, the Fed was not explicitly setting the rate on the 30-year bond as much as it was just trying to make sure long-terms rates in general stayed relatively low. The hope was that by keeping long-term rates low it would encourage more borrowing by consumers (e.g. cheap mortgage rates to goose home buying) and more investment by corporations (because a lower cost of capital would result in more investment projects having positive net present values based on a discounted cash flow basis—-or a higher internal rate of return—pick your poison regarding the preferred capital budgeting methodology).
 
Thank you both - makes sense. ‘Verbal persuasion’ was an interesting way to word it, but I get what they’re trying to say haha.
 
REPE wrote:
Thank you both - makes sense. ‘Verbal persuasion’ was an interesting way to word it, but I get what they’re trying to say haha.
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Hust remember… fortunes are made or lost, based on if Jerome Powell says the…… or theeee
;-)
ps - good luck on your exam. I’m lit ASF right now with my boss. Dm me if you want….. to talk econ
 
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