fed sells securities, which leads to real money decrease, then people sell bonds to increase money hold, bond price falls and the interest rate rises. Am I right?
I would concur with that statement.
Think about it for a second. Fed open market operations are about an overnight interest rate. The bonds the Fed “sells” (they almost never really sell bonds, but reverse repo them) are long term bonds so it’s not the increased supply of bonds causing the Fed Funds rate to rise, it’s the shortage of cash.
It appears to be a chicken and egg situation. Does the interest rate rise because there is a shortage of cash, or does a shortage of cash cause the interest rate to rise? The way the CFAI text explains the phenomenon is that people increase or decrease the cash they hold based on the opportunity cost of holding cash (i.e. interest rates), and the subsequent selling(buying) of bonds decreases(increases) the price of the bonds ultimately having in inverse effect on interest rates. the steps wolwol posted above are exactly what the CFAI text (volume 2, pg 380-381) says… until I read that section I would have given the same explanation as Joey. I believe the CFAI text is trying to illustrate the quantity of money equilibrium where the quantity of money supplied equals the quantity of money demanded; the money supply at any given moment is fixed (perfectly inelastic) and the demand for money is a downward sloping line as a function of interest rates. Therefore open market operations are used to change the supply of money with the intent to influence the demand for money… again I’ll say I do not contest that Joey’s statement is correct, but I didn’t want people to dismiss wolwol’s statement since there is material supporting it in the text and because we may very well see similar language on the exam.