uploads///Federal funds rate has remained low

Why Low Interest Rates Have Affected Asset Prices And Yields

By

Nov. 20 2020, Updated 12:13 p.m. ET

At this point, the federal funds rate has been close to zero for over six years. But as we head into 2015 and investors look to position portfolios, many are asking whether this year might be the year when interest rates begin to rise. After all, the Fed doesn’t actually set interest rates; rather it tries to influence them through its monetary policy.

Article continues below advertisement

Market Realist – Low interest rates have supported the economy, but…

The graph above shows the history of the federal funds rate. The federal funds rate is a mechanism that the Fed uses to control the interest rate in the economy. The rate has been close to zero for six years.

The Fed maintained low interest rates to stimulate growth after the financial crisis. Along with low rates, the Fed aggressively purchased long-dated Treasuries (TLT) and MBS (mortgage-backed securities) to pump money into the economy. This was to create demand by boosting consumption and investment. The Fed has continued to keep rates low, for the reasons we cited in the first part of this series.

The accommodative monetary policy boosted the US economy. It helped the S&P 500 (IVV) increase by ~47% since September 2012. However, there were some side effects.

Treasury yields have been beaten down due to the Fed’s excessive buying. Currently, ten-year Treasury (IEF) yields are 1.8%. The search for yields led investors to enter into risky assets—like high yield bonds (HYG) and emerging market bonds (EMB). This decreased their yields as well. Another side effect of low interest rates is that it discourages household savings.

The next two parts of this series explain why interest rates could stay low for longer.

Advertisement

More From Market Realist

  • Open sign on a sidewalk
    Macroeconomic Analysis
    Top Reopening Stocks to Play the Shifting Market Sentiment
  • Morgan Stanley sign and stock numbers
    Macroeconomic Analysis
    Morgan Stanley's Buyback Stock Picks in 2021
  • Black Wall Street sign is sign of ethical investing
    Macroeconomic Analysis
    Ethical Investing Stocks and Funds for Your 2021 Portfolio
  • New York City skyline and Goldman Sachs logo
    Macroeconomic Analysis
    Goldman Sachs: Options Trade Picks to Play Earnings Season Volatility
  • CONNECT with Market Realist
  • Link to Facebook
  • Link to Twitter
  • Link to Instagram
  • Link to Email Subscribe
Market Realist Logo
Do Not Sell My Personal Information

© Copyright 2021 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.