[pat]

IOW what is the mechanism the Fed uses to create this effect?

Interest rates are low but that appears to be more organic than Fed induced.

It seems that if the velocity of money is at historic lows that the low interest rate is where it would be otherwise.

The obvious thing is the Fed balance sheet being ginormous.

I guess if the money supply were not so big it wouldn’t create the bubble in the stock market.

So the low interest rates are not the real cause?

https://lara-murphy.com/connection-fed-stock-market/

TIA

[jmherbener]

Here is what the correlation looks like for the entire data set FRED has on the S&P 500:

https://research.stlouisfed.org/fred2/graph/?chart_type=line&recession_bars=on&log_scales=&bgcolor=%23e1e9f0&graph_bgcolor=%23ffffff&fo=Open+Sans&ts=12&tts=12&txtcolor=%23444444&show_legend=yes&show_axis_titles=yes&drp=0&cosd=1984-02-15%2C1984-02-15&coed=2016-05-11%2C2016-05-11&height=445&stacking=&range=&mode=fred&id=BASE%2CSP500&transformation=lin%2C&nd=%2C&ost=-99999%2C&oet=99999%2C&lsv=%2C&lev=%2C&scale=left%2C&line_color=%234572a7%2C&line_style=solid%2C&lw=2%2C&mark_type=none&mw=2&mma=0%2C&fml=a%2C&fgst=lin%2C&fgsnd=2007-12-01%2C&fq=Biweekly%2C+Ending+Wednesday%2C&fam=avg%2C&vintage_date=%2C&revision_date=%2C&width=670

The correlation is not so impressive for the entire set of data and when one doesn’t scale the S&P 500 data to make it start at the same height as the Monetary Base data in 2009.

Even though the Monetary Base skyrocketed, neither short-term nor long-term interest rates fell continuously decline from 2009-2016. So falling interest rates did not cause the stock market to boom.

https://research.stlouisfed.org/fred2/series/DCPF3M

https://research.stlouisfed.org/fred2/series/BAMLC0A1CAAAEY

Most of the Fed’s expansion of the monetary base has been absorbed by banks as excess reserves.

https://research.stlouisfed.org/fred2/series/EXCSRESNS

Apparently, The Fed’s massive expansion of the Monetary Base has resulted in some credit expansion which has been channeled by investors into the stock market (as well as housing markets and auto markets) to just the extent that we see the correlation noticed by Lara and Murphy.

[pat]

Thank you Professor Herbener, for the very complete answer.

[Author]

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