Lowering the interest rate has the effect of decreasing the risk for every asset class. This causes the expected return to go up and thus the value of the asset which leads to more buying of assets (for example getting a mortgage for fear of missing out) and greater optimism in the market (more risk taking). This is how the Fed tries to stimulate the economy.
However, this also makes it harder for lower risk investing (for example pension funds with a 5-7% target return), they will need.
Low rates make risk aversion harder to practice and risk taking more palatable.
See also:
- Coming into focus memo by Howard Marks
Links to this note
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Economists and financial analysts often assume high interest rates are associated with tight monetary conditions and, conversely, low interest rates are associated with easy money. In reality they indicate the opposite because of the supply side of credit.
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Avoiding Losers as an Investment Strategy
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Tech Stocks Go Down When 10-Year Treasury Bond Yields Go Up
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The Stock Market Boom During the Pandemic Is Due to Increased Savings
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Interest Rates Are the Price of Time
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Cryptocurrency Is Not Immune to Market Conditions
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