When the Federal Reserve buys bonds, bond prices go up, which in turn reduces interest rates.3 The direct effect of a bond price increase on interest rates is easiest to see. If a $100 bond pays $5 per year in interest, then the interest rate on that bond is 5% per year.

OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase.

When Fed policymakers decide they want to lower interest rates, the Fed buys government bonds. This purchase increases the price of bonds and lowers the interest rate on these bonds. (We can think of this as the Fed increasing the money supply, which makes money more plentiful and drives down the price of borrowing.)

The Federal Reserve’s purchase of longer-term Treasury securities is part of their efforts to support the economy through quantitative easing. Those purchases inject money into the economy to lower interest rates and therefore encourage lending and investment.

Quantitative easing pushes interest rates down. This lowers the returns investors and savers can get on the safest investments such as money market accounts, certificates of deposit (CDs), Treasuries, and corporate bonds. That inspires investors to buy stock, which causes stock prices to rise.

Let’s look at what has happened since the March 11 Fed balance sheet. So far, since March 11, the Fed has pumped in $2.3 trillion to the economy in new dollars. That is mostly QE (the blue column), with an additional $195 billion in loans (the facilities), offset by a reduction in repo of $163 billion.

New York Federal Reserve injects $1.5 trillion into markets amid coronavirus chaos for stocks.