The Fed, Treasury Bonds and Interest Rate

[Mario J Perez]

I recently read that the Federal Reserve recently purchased 600 million in Treasury Bonds; dubbed QE2. How does it help keep interest rates low?

[Paul B.]

$600 billion, not $600 million, although there was such a typo in the Wall Street Journal,

The Fed buys bonds, which creates a shortage of bonds relative to all the cash out there that would otherwsie be invested in bonds, which creates excess liquidity since that cash needs to be invested elsewhere. More dollars chasing fewer investments keeps those prices up and higher, which means rates on fixed-income investments fall and stay lower.

And this:
QE Explained Video