Final answer:
To lower interest rates, the Fed conducts open market operations by buying bonds, increasing bank reserves and lowering the federal funds rate. Conversely, to raise interest rates, the Fed sells bonds which reduces bank reserves and increases the federal funds rate.
Step-by-step explanation:
To lower interest rates via open market operations, the Federal Reserve (the Fed) would buy bonds. This action increases the quantity of bank reserves in the banking system, leading to a decrease in the federal funds rate which is the rate banks charge each other for overnight loans. The operation of buying bonds injects liquidity into the banking system, allowing banks to lend more easily, which in turn can lead to lower interest rates.
The central bank can adjust the supply of reserves through open market operations to ensure that the federal funds rate stays within the target range set by the Federal Open Market Committee (FOMC). If the Fed seeks to raise interest rates, it sells bonds, which reduces the quantity of bank reserves and increases the federal funds rate.