The attached plots log(SP500) monthly for the then-current Fed funds rate (1954-2011). Various dates are marked:

1981: Peak Fed rate of 19%, following a period ranging as low as 4%, with relatively range-bound stocks of the 70's

1984: Stocks rose as the rate fell from 10% to 8%, punctuated by a pause as Fed rate jumped and declined again around 1984

1989: Stocks rose as the rate declined from 9 to 6%, rose more as the rate went from 6 back to 10% in 1989, and continued to rise as the rate fell from 10% to 3% in 1993.

2000: The vertical rise in stocks from mid-90's to 2000 occurred while the rate stayed around 5-6%

2000-2011: Rates varied from 6% to the current zero, while stocks were substantially stuck over the decade. The back and forth in stocks and Fed rate over this decade approximates a line with positive slope: high (low) rates with high (low)stocks, which fits with a market-fixated FED (easing/tightening when stocks fall/rise).

The little vertical line between 2009 and 2011 is stock drop and rebound during the unprecedented (in this series) zero fund rate regime - giving the impression the FED might like to move things out of the endzone in order to keep playing.

Bud Conrad writes:

What a confusing way to present data. The usual Fed Model compared earnings yield against  interest rates like the 10 year Treasury.

The conclusion is that lower Treasury yield supports stocks (through lower earnings yield (higher P/E)).

The only indirect indication in this chart is that as the Fed funds dropped, stock went up, sort of. (Negative slope after 1981).

Kim Zussman writes: 

The point of plotting this way (stock per fed funds rate) vs other conventional published methods was to see what, if any, correlation Fed rates have with stocks. The Fed can and does vary this rate, but not long rates and not stock earnings.


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