>>20049333>Can anyone explain to me why the Federal Funds Rate has anything to do with equities? It's all about the availability of capital. When fed rate rises capital costs get higher. This causes businesses to pause plans for growth and lessen capital investment/expenditure plans. It's all about risk:reward. At high federal rates CDs and other low risk instruments have higher returns which drives more capital towards them. Think about it like this: if instrument A could pay 8% with some risk, but treasuries or CDs pay 6% risk free, why take the risk? The follow-on effect is that in a tighter capital environment businesses don't grow as much and therefore investor sentiment about growth is cooled. PE ratios trend lower (towards where they should be in reality, imho).
>The current rate obviously has not been an issue for businesses, we're still seeing blowout earnings reports and good guidance.Capex runs on a multi-year cycle which means we won't see the effect on equity markets for a little while.
>Why is it somehow suddenly an issue for the stock market if the Fed doesn't cut rates at the next FOMC? They're concerned for negative equity growth like 6-12 months out.
>Honestly I don't think it's the catastrophe that people want it to be and bears are getting a bit overzealous.Yeah, investors do tend to overestimate the effect of policies and events. This cuts both ways. Hype bubbles and markets being oversold both do happen. It's just that recently historically low rates over the last 25 years have led to more bullish than bearish overreactions.
