ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Consider, first, why the Fed buys bonds to boost growth and inflation. Bond-buying, or “quantitative easing” (QE), works via the so-called credit channel. That is, it encourages banks to lend more. When the Fed buys bonds from banks, their cash reserves at the Fed go up.

Detailed explanation-2: -When the Federal Reserve buys bonds, bond prices go up, which in turn reduces interest rates. Open market purchases increase the money supply, which makes money less valuable and reduces the interest rate in the money market. OMOs involve the purchase or sale of securities, typically government bonds.

Detailed explanation-3: -The Fed purchased longer-term securities on the open market, including U.S. Treasuries and mortgage-backed bonds. These investments in securities (typically in the fixed income market) add liquidity and reduce borrowing costs to encourage economic activity through more lending and investment.

Detailed explanation-4: -The three traditional tools of monetary policy Buying bonds injects money into the money market, increasing the money supply. When the central bank wants interest rates to be higher, it sells off bonds, pulling money out of the money market and decreasing the money supply.