Chart of the Week: What Happens When the Federal Reserve Keeps Interest Rates Low?
This chart goes well with an earlier post about how interest rates impact the economy. The Federal Reserve announced today that they will be ending their Quantitative Easing program(technical term for the Federal Reserve keeping interest rates low by purchasing bonds) after almost five years of intervention. One major beneficiary of this policy: the stock market!
A few ideas to engage your students:
- Have them calculate the increase in the S&P500 (see chart below) since QE began in late 2009 by estimating start and end points on the graph.
- Have them discuss why they think the stock market benefited from this low interest rate policy. See how many of these they come up with:
- Low interest rates on savings accounts cause investors to seek higher returns in alternative places, such as the stock market.
- Low interest rates make it easier for companies to borrow money to expand their businesses (new plants, etc.). Many companies used these lower rates to buy back their own stock too.
- Low interest rates boost economic activity (see earlier post) which often translates into higher sales and earnings for companies which boosts stock prices.
- Knowing that the Federal Reserve will intervene whenever economic growth appears to be slowing (as they did multiple times in the last five years), emboldens investors to buy stock.
About the Author
Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.