Interest rates have some impact on the stock market because if investors can earn a better return in bonds than in the stock market and with less volatility they will sell stocks and invest in bonds. A large part of the recent record highs in the stock market reflect the Fed’s squashing of interest rates. The Fed wants to punish savers and reward debtors.
Interest rates have been falling since the early 1980’s to near zero today. According to the Financial Times columnist, Gavyn Davies, my main source for what central bankers are thinking, the International Monetary Fund identified three main reasons for the decline depending on the period:
- In the 1980’s and 1990’s Fed inflationary policies caused the drop.
- Since 2008, businesses have quit investing.
- 2002 – 2007, the savings glut from emerging markets kept rates low.
- Since 2000, portfolio shifted to bonds because of two stock market crashes.