Does the Fed keeping interest rates low stimulate investment in the stock market and other investments?
Investopedia has this note where you'd want the contrapositive point: The interest rate, commonly bandied about by the media, has a wide and   varied impact upon the economy. When it is raised, the general effect   is a lessening of the amount of money in circulation, which works to   keep inflation low. It also makes borrowing money more expensive,   which affects how consumers and businesses spend their money; this   increases expenses for companies, lowering earnings somewhat for those   with debt to pay. Finally, it tends to make the stock market a   slightly less attractive place to investment. As for evidence, I'd question that anyone could really take out all the other possible economic influences to prove a direct co-relation between the Federal Funds rate and the stock market returns.  For example, of the dozens of indices that are stock related, which ones would you want that evidence: Total market, large-cap, small-cap, value stocks, growth stocks, industrials, tech, utilities, REITs, etc.  This is without considering other possible investment choices such as direct Real Estate holdings, compared to REITs that is, precious metals and collectibles that could also be used.
The stock market in general likes monetary easing. With lower interest rates and easy cheap money freely available, companies can borrow at reduced cost thus improving profits. As profits increase share prices generally follow. So as John Benson said Quantitative Easing usually has a positive effect on stocks. The recent negativity in the stock markets was partly due to the possibility of QE ending and interest rates being raised in the future. When inflation is high or is rising generally interest rates will be raised to reduce people spending their money and slow down the rate of inflation. As interest rates rise people will be less willing to borrow money and more willing to keep their money earning a good interest rate in the bank. People will reduce their spending and invest less into alternative assets but instead put more into their bank savings. When inflation is too low and the economy is starting to slow down generally interest rates will be raised to encourage more spending to restart the economy again. As interest rates drop more will take their saving out of their bank accounts as is starts to earn very little in interest rate and more will be willing to borrow as it becomes cheaper to borrow. People will start spending more and investing their money outside of bank savings. The current FED's spend is to encourage spends by putting in more liquidity, SOME of this funds [directly or indirectly] reach emerging markets and get invested in stocks ... so without these forex inflows, the Balance of Payments would be under pressure ... so these forex are artificially keeping the Exchange rate down. For example the USD vs INR rate was in the range of 1 USD to around INR 50 for nearly 4-5 years. In the period the inflation in India was around 10-15%, so ideally the rate should have slowly moved towards INR 60, however it took a news of FED cut-back to more the rates in the range of INR 65 before stabilizing to Rs 60 When the inflation rate increases, this tends to push up interest rates because of supply and demand: If the interest rate is less than the inflation rate, then putting your money in the bank means that you are losing value every day that it is there. So there's an incentive to withdraw your money and spend it now. If, say, I'm planning to buy a car, and my savings are declining in real value, then if I buy a car today I can get a better car than if I wait until tomorrow. When interest rates are high compared to inflation, the reverse is true. My savings are increasing in value, so the longer I leave my money in the bank the more it's worth. If I wait until tomorrow to buy a car I can get a better car than I would be able to buy today. Also, people find alternative places to keep their savings. If a savings account will result in me losing value every day my money is there, then maybe I'll put the money in the stock market or buy gold or whatever. So for the banks to continue to get enough money to make loans, they have to increase the interest rates they pay to lure customers back to the bank. There is no reason per se for rising interest rates to consumers to directly cause an increase in the inflation rate. Inflation is caused by the money supply growing faster than the amount of goods and services produced. Interest rates are a cost. If interest rates go up, people will borrow less money and spend it on other things, but that has no direct effect on the total money supply. Except ... you may note I put a bunch of qualifiers in that paragraph. In the United States, the Federal Reserve loans money to banks. It creates this money out of thin air. So when the interest that the Federal Reserve charges to the banks is low, the banks will borrow more from the Feds. As this money is created on the spot, this adds to the money supply, and thus contributes to inflation. So if interest rates to consumers are low, this encourages people to borrow more money from the banks, which encourages the banks to borrow more from the Feds, which increases the money supply, which increases inflation. I don't know much about how it works in other countries, but I think it's similar in most nations. The Fed is trying to keep the money supply growing at a rate just slightly faster than the increase in the total production in the economy. If this year we produced, say, 3% more goods and services than last year, than they try to make the money supply grow by maybe 4% or 5%. That way there should be a small rate of inflation. They are trying to prevent high inflation rates on one hand or deflation on the other. When the interest rate on T-bills is low, banks will borrow more money. As the Fed creates this money out of thin air when banks buy a T-bill, this adds money to the economy. When the interest rate on T-bills is high, banks will borrow little or nothing. As they'll be repaying older T-bills, this will result in less growth in the money supply or even contraction. So the Feds change the rate when they see that economic growth is accelerating or decelerating, or that the inflation rate is getting too high or too low. Reasons for no: In your first sentence you say something interesting: rates low -  prices high.  Actually those 2 are reversely correlated, imagine if rates would be 5% higher-very few people could buy at current prices so prices would drop. Also you need to keep in mind the rate of inflation that was much higher during some periods in the US history(for example over 10% in the 1980) so you can not make comparisons just based on the nominal interest rate. Putting all your eggs in one basket. If you think real estate is a good investment buy some REITs for 10k, do not spend 20% of your future income for 20 years. Maintenance - people who rent usually underestimate this or do not even count it when making rent vs mortgage comparisons. Reasons for yes:   Lifestyle decision - you don't want to be kicked out of your house, you want to remodel...     Speculation - I would recommend against this strongly, but housing prices go up and down, if they will go up you can make a lot     of money. To answer one of questions directly: 1. My guess is that FED will try to keep rates well bellow 10% (even much lower, since government can not service debts if interest rates go much higher), but nobody can say if they will succeed. Nah it's far from that simple. The effects of low interest rates will decline over time.   That's the nature of the beast. Without continuous input of bullish stimuli, and as leveraged longs grow and grow, stock market growth will become increasingly vulnerable to small shocks which turn into bigger shocks. Thanks. It has taken me some time to understand how all this works, and there are still many gray areas I want to understand further.  The Fed interest rate is the rate charged by banks to loan to each other to balance overnight reserves but only using the reserves they hold at the Fed. That adds no new money to the system, but increases the money multiplier a little since perhaps more loans can be made.   Basically one bank with excess reserves can loan to another bank that needs reserves. The Fed injects no money here, only sets the rate for banks to do this with each other.  When the Fed buys securities that effectively adds that many more dollars into circulation, which then gets hit by the money multiplier, adding a lot of new liquidity.  I think historically the latter tracks increases in the money supply much better than the former. I think the St. Louis Fed has records online for all this dating back to the 1940's or so. So after you learn some basics about bubbles you might then see that interest rates kept at their lowest since the days they were backed with gold may allow a bubble to form in housing.   You know the bond purchases increased real estate prices right? What is it about the magic $2 Trillion that makes you think the FED hit the spot right on? The Fed controls the base interest rate for lending to banks. It raises this rate when the economy is doing well to limit inflation, and lowers this rate when the economy is doing poorly to encourage lending. Raising the interest rate signals that the Fed believes the economy is strong/strengthening.   Obviously it's more complicated than that but that's the basic idea. Lowered rates = boom for equities, currently held bonds, and assets. Cheaper money means a (disproportionately) good time had by all. This all comes with malinvestment, potential for moral hazard, and savers losing in a big way. Why save for retirement when your risk free return on US Treasuries can barely keep up with inflation? As an aside, it is not really a risk free rate anymore, with $20 trillion in debt and no real hope of paying it off.  This is why we see the rate increases and movement towards asset sales by the Fed to get the poop off their books. They are worried about all of the above and need more arrows in their quiver when the next recession hits. They won't have enough, however. They are trying to right a ship that is fully overturned.   This is now the longest period of growth (however tepid) since the tech bubble of the 1990's. Are the fundamentals really better than then? "I'd refer you to Is it true that 90% of investors lose their money? The answer there is ""no, not true,"" and much of the discussion applies to this question.  The stock market rises over time. Even after adjusting for inflation, a positive return. Those who try to beat the market, choosing individual stocks, on average, lag the market quite a bit. Even in a year of great returns, as is this year ('13 is up nearly 25% as measured by the S&P) there are stocks that are up, and stocks that are down. Simply look at a dozen stock funds and see the variety of returns. I don't even look anymore, because I'm sure that of 12, 2 or three will be ahead, 3-4 well behind, and the rest clustered near 25.  Still, if you wish to embark on individual stock purchases, I recommend starting when you can invest in 20 different stocks, spread over different industries, and be willing to commit time to follow them, so each year you might be selling 3-5 and replacing with stocks you prefer. It's the ETF I recommend for most, along with a buy and hold strategy, buying in over time will show decent returns over the long run, and the ETF strategy will keep costs low." "He's misunderstanding Buffett's argument, which is that all forms of investment compete, and so when interest rates give you guaranteed low returns, it makes sense for stocks to give you average low returns.  That implies *high* prices for current stocks, because your return on equities is the price tomorrow over the price today.  Buffett would likely agree with him that this implies slow growth in the future, though he may not want to say so for competitive reasons.  Historical P/E norms are a more wrong metric, because they don't capture any fundamental change that might have happened in the economy.  What's likely going on is a surplus of capital: as business becomes more efficient (i.e. generates more revenue with fewer workers), that excess cash flow becomes investable capital, but as it becomes more efficient (i.e. less of that revenue filters down to workers in the form of wages that they can spend on consumer goods), the amount of productive uses where that capital can be effectively deployed in income-generating activities declines.  More capital + fewer investable opportunities = higher supply + lower demand = the price of securities for the few areas of the economy that *are* doing well increases.  This is why you see insane valuations for tech companies.  If we do get a major economic crash, it will likely come from a Carlota Perez-style financial crisis, where all the money gets concentrated within emerging new industries focused on new technology, who can't sell their products because nobody else has any money.  We're on the path to that already, but it will likely take a decade or two to play out; there's still a lot of money left in the ""old economy"" which can be extracted.  Also, these style of financial crises usually are accompanied by war and a breakdown of the established political order, and so all bets are off anyway." Interest rates can't remain this low. It's like having extremely low blood pressure. When you raise the rates, banks are incented to loan money and that movement of capital is good for the economy. It forces us to become savers instead of spenders, and our pensions, 401ks, social security are all getting killed by not being able to use debt to get safer stable returns.  Interest rates have to come back up. One thing to note before buying bond funds. The value of bonds you hold will drop when interest rates go up. Interest rates are at historical lows and pretty much have nowhere to go but up. If you are buying bonds to hold to maturity this is probably not a major concern, but for a bond fund it might impair performance if things suddenly shift in the interest rate market.