Fiat money is a currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made from.
This means that, unlike commodities like gold or silver, fiat money's value is not intrinsic. Rather, it is based on faith in the issuing government. In other words, when people trust their government enough to accept the paper bills they produce as payment for goods and services, those pieces of paper can then serve as a medium of exchange.
The Federal Reserve Bank (the Fed) is responsible for regulating U.S. monetary policy, including the setting of interest rates and managing inflation. One thing the Fed does to regulate the amount of money in circulation is bought securities, such as Treasury bonds and mortgage-backed securities.
When it buys these securities, new cash flows into financial institutions where the securities are held; this process makes more loans available for consumers and businesses to take out. Conversely, when the Fed sells off its securities holdings, banks have less cash available to lend out. Lowering the supply of loans tends to push up interest rates because banks will charge higher prices to get people to borrow money. Higher interest rates make borrowing costlier, so investors may decide not to purchase stocks or corporate bonds--thus lowering share prices--because they find them too expensive.