Why does that fed buying bonds lower interest rates.
There are those that pay interest and those that receive it.
The borrower is slave to the lender
It is my understanding they are not correlated with each other.
When the Fed buys bonds it is to create wealth or pump money into the economy.
Wealth or new money is created through loans. This is why credit is so important.
creating more “demand” for government debt issues (bonds).. lowers the price (interest rate) the govt has to pay to get more debt issues (bonds) sold
cost of sale (interest rate govt has to pay) goes down as there are more bidders/buyers... the bidders are willing to purchase the bonds (IOUs) for (at) a lower interest rate
or something like that
The law of Supply and demand. When the Fed signals a willingness to pay above-market prices for bonds, the increased demand triggers an overall hike in trading price for bonds.
The same would be true if the government entered the housing market and began purchasing large numbers of homes at inflated prices - housing prices would rise.
The way this relates to interest rates is that bonds always trade at a discount of what they will be worth at maturity, based on the time value of money. The amount of discount is what determines interest rates.
For example, if traders will pay $90k today for a 3 year bond that will be worth $100k at maturity, that $10k discount implies an annual interest rate of 3.58%. If the government enters the bond market and drives the trading price of that bond up to $93k, the discount is now only $7K, which implies an interest rate of 2.45%.
So the Fed has lowered interest rates.