Tags: Money | Federal Reserve | Stock Market

How Does the Fed Affect the Stock Market?

By    |   Wednesday, 01 July 2015 09:42 PM

Federal Reserve actions to control the federal funds rate — the interest rate banks pay to borrow money from Federal Reserve banks — affect the stock market.

The trickle-down behavior of consumers and businesses as interest rates rise and fall affects companies and in turn, affects the stock market, according to Investopedia.

Higher interest rates make borrowing money more expensive, which may cause individuals and companies to limit spending. As a result, company revenues may fall, resulting in a hit to their stock prices. If a groundswell of companies see their stock values decline, the stock market itself also falls, Investopedia notes of the chain reaction.

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According to the website About Money, the Federal Open Market Committee set up to review interest rates is perhaps the most important influencer on the stock market, its actions providing immediate consequences to those who are investing.

As interest rates are raised, business growth and consumer spending fall. Conversely, if the economy grows sluggish, a lowering of interest rates encourages spending, which fuels business growth. Those corresponding highs and lows affect growth of stock prices and influence investors in the market, About Money noted.

CNN noted that stock market investors have the right to be concerned about rate increases, citing historical trends. "Since World War II there have been 16 cycles during which the Fed has boosted interest rates. The risks are particularly acute when the Fed first raises rates," CNN reported in a March 9 Stocks Watch column by Matt Egan.

"During the six months before or after the first rate hike, the S&P 500 experienced a decline of 5 percent or more 13 times," Egan noted, citing a research report from Sam Stovall, chief investment strategist at S&P Capital IQ. "That means over 80 percent of the time, the stock market suffered a blow when the Fed raised rates."

CNN also noted that volatility would likely occur in the stock market as the result of an expected 2015 interest rate increase.

"Stocks are already considered expensive and many on Wall Street fear markets are overdue for a correction (when they drop 10 percent or more), which hasn't happened since 2011," CNN said in March 19 story by Patrick Gillespie.

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Federal Reserve actions to control the federal funds rate - the interest rate banks pay to borrow money from Federal Reserve banks - affect the stock market.
Federal Reserve, Stock Market
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2015-42-01
Wednesday, 01 July 2015 09:42 PM
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