Question

In one or two paragraphs, please discuss how Fed Reserve’s interest rate policy will influence Stock and Bond markets.

Answer 1

Federal reserve Interest rate policy does impact the stock and bond market but in a different way the way it impacts the stock market and the way it impacts the bond market. The impact by federal reserve Interest rate policy on stock market is rather Indirect and direct Impact on the bond market.

When Fedral reserve Increases the Interest rate, the cost of borrowing money from banks and other financial Institution Increases. When the cost of funds goes up business might not be able to raise sufficient funds for investment and future earnings might fall, then less dividend, then fall in share price, more or less a negative Impact on the market, whereas if the federal reserve reduces the Interest rate, it is cheaper to borrow funds for investment purposes, businesses Invest more, earnings might increase, there is general overall positive sentiments in the market.

The impact of Interest rate on the bond price is rather direct. There is an Inverse relationship between bond price and Interest rate. Lower the Interest rate used to discount the bond price today, higher will be the bond price. Higher the Interest rate used to discount the bond price today, lower will be the bond price. Hence, the impact of federal reserve Interest rate policy has rather direct Impact on the bond market.