I heard that if the Fed keeps interest rates low then folks with money to invest will choose something other than just a money market or passive sort of investment, perhaps choosing investing in the stock market, etc. Is that true and if so what evidence is there?

(I know this occurred to me: if there are poor choices for investing my money I'm more likely to spend it on my own company where I am more confident I can get a ROI).


1 Answer 1


Investopedia has this note where you'd want the contrapositive point:

The interest rate, commonly bandied about by the media, has a wide and varied impact upon the economy. When it is raised, the general effect is a lessening of the amount of money in circulation, which works to keep inflation low. It also makes borrowing money more expensive, which affects how consumers and businesses spend their money; this increases expenses for companies, lowering earnings somewhat for those with debt to pay. Finally, it tends to make the stock market a slightly less attractive place to investment.

As for evidence, I'd question that anyone could really take out all the other possible economic influences to prove a direct co-relation between the Federal Funds rate and the stock market returns. For example, of the dozens of indices that are stock related, which ones would you want that evidence: Total market, large-cap, small-cap, value stocks, growth stocks, industrials, tech, utilities, REITs, etc. This is without considering other possible investment choices such as direct Real Estate holdings, compared to REITs that is, precious metals and collectibles that could also be used.

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