Why do purchases of securities by the Federal Reserve Open Market Operations reduce the Federal Funds rate?”
The short version is that the Federal Open Market Committee (FOMC) is purchasing securities with cash so they are putting more cash into the hands of banks. If the banks have more cash to lend this pushes down interest rates because there is more cash to meet demand of borrowers. If demand goes up and the supply of money stays the same then it is logical to conclude rates must go up. Similarly if demand is not growing but the supply of money increases then rates must fall. If the Fed sells securities it is removing money from the banking system which means banks have less to lend. If demand is constant and supply shrinks then rates go up.
