Interest rates are influenced by the Federal Reserve namely, the Federal Open Market Committee. Meeting various times a year they examined economic indicators and issue statements which reflect their decisions.

When they wish to take actions that would raise interest rates their statements would be referred to as “hawkish” and if their statements reflected a lowering of interest rates men in the announcement could be termed “dovish”. Also, the Federal Open Market Committee will probably specify a lower target for the Fed Funds rates with a statement such as “The Federal Open Market Committee decided to reduce the Fed Funds target rate to 6 1/4% from 6 1/2%” and on occasion it may make a statement about the expected rate of growth of the money supply such as “contemplated reserve conditions are expected to be consistent with moderate to slightly faster growth over the coming months.”

The process starts with the open-market purchase of Treasury securities at the trading desk at the New York Fed. The open-markets purchase injects additional reserves in the banking system and hence, will lead to an increase in the money spot. This happens because banks expand their deposits (money supply) until they have no excess reserves by making loans for purchasing securities.

Increase in the money supply as a means of increasing the quantity of funds available to lend all else the same, in increasing the supply of global funds causes a decline in interest rates in financial markets as well as a decline in lending rates at financial institutions. A decline in interest rates and financial markets increased the market value of fixed income securities like corporate bonds, mortgages and mortgage-backed securities. All of this starts with the statements issued by the Federal Open Market Committee. Investors and speculators pay heed to these announcements as they need to adjust their positions in anticipation of the actions of the Federal Reserve.

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