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In the aftermath of the financial crisis, the Federal Reserve began the process of purchasing $600...

In the aftermath of the financial crisis, the Federal Reserve began the process of purchasing $600 billion in U.S. Treasury bonds. In terms of the bond supply and demand model, analyze the impact of this purchase on the bond market (to be clear: how does this affect bond prices? How does this affect interest rates?).

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If Federal Reserve purchases U.S. Treasury bonds, the bond prices rise and interest rates go down. These open market purchase by Fed will increase money supply in the market, reducing the value of money leading to reduction in interest rates. When Fed starts buying bonds, the demand of bond increases and supply goes down, so the price of bonds inflates and interest rates decreases. This action increases the supply of cash in the market and is considered as stimulating package for the economy. As the bond prices rise, the interest rates go down as bond price and interest rate has inverse relationship.

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