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Interest rates in most of the developed world have been on the decline for almost 30 years. There is no way to just magically increase interest rates in the mar

Interest rates in most of the developed world have been on the decline for almost 30 years. There is no way to just magically increase interest rates in the market. Contrary to the popular belief, the Fed doesn't set interest rates in the economy, and it has even lower power over long-term interest rates [1]. Also, you're interested in interest rates above and beyond inflation, i.e. 'real' rates of return, not nominal. [1] http://aswathdamodaran.blogspot.co.uk/2015/09/the-fed-interest-rates-and-stock-prices.html http://aswathdamodaran.blogspot.co.uk/2015/09/the-fed-intere...

retrogradeorbit 10y ago
I disagree with almost everything you said here. And a blogspot link does not prove your point. It's just someone's opinion. Interest rates aren't directly set by central banks, but of course they influence the cost of borrowing for commercial banks. That's why when central bank rates fall, commercial rates fall too. And visa versa. And why when commercial banks don't lower rates in turn there is political pressure to "pass on the savings". As for longer term rates, they do have power over that by selling one maturity of instrument for the purchasing of another maturity. This has colloquially been called "operation twist". I am fully aware of real vs nominal. But I'm curious. How do you know what real rates are if you do not have a consistent, repeatable, uncorrupted measure of inflation?
- ucaetano 10y ago
  "It's just someone's opinion" In this case it's Damodaran's opinion, so yeah, it matters, like, a lot. "Interest rates aren't directly set by central banks" The "risk-free" interest rate for a country is. All other rates are derived from it (see CAPM). Interest rates for any loan, or cost of capital for any enterprise is the risk-free rate plus the risk premium. "what real rates are if you do not have a consistent, repeatable, uncorrupted measure of inflation?" You can use a lot of proxies for that, and you'll see cases where there are major disagreements between what the market sees as inflation and what the government says it is (see Venezuela and Argentina, for example, http://www.economist.com/node/21548242 http://www.economist.com/node/21548242). That aside, the market usually has a fair trust of statistical institutions that calculate inflation, because that data is quite transparent.
- lmm 10y ago
  > Interest rates aren't directly set by central banks, but of course they influence the cost of borrowing for commercial banks. That's why when central bank rates fall, commercial rates fall too. And visa versa. And why when commercial banks don't lower rates in turn there is political pressure to "pass on the savings". Sure, but that's all nominal. Real interest rates are necessarily the rate of concrete economic growth; central bank interest rates cannot affect that except to the extent that they actually impact the real economy (i.e. if they make investment easier/harder that can affect real productivity). > I am fully aware of real vs nominal. But I'm curious. How do you know what real rates are if you do not have a consistent, repeatable, uncorrupted measure of inflation? You need a measure of what you value - which is up to you. Whatever that measure is, you can figure out how much value you get by spending money now vs by investing and spending money later. The interest rate is just a consensus/average of those.
- lgieron 10y ago
  The central bank can set their rate at 1000%, but if no one has any potential investments that can yield 1000%+ returns, companies just won't borrow money. In other words, no one will be getting 1000% returns on their savings. On the other hand, if you'd be willing to lend your savings at say 5%, you might find action.
  - mywittyname 10y ago
    People invest in the CB and earn their guaranteed return. This would drive inflation as bonds mature and soon investment returns would eventually look something like (1000 + $realReturn)%. Maybe not at such an extraordinary rate, but Volcker raised rates to 10-21% in the early 80s and US-based stock returns during that era were substantially higher than at any other time. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... Referring to that, in the 16 years after the 10 T-Bond return hit a peak of 33% in 1982, stocks yielded over 30% in six separate times. In the next 16 years, from 1999 to 2015, it's done that once, 8 years after a -30% return from the crash of 2008. The S&P also yielded 30+% only twice in the 16 years before 1983. It's not concrete evidence, but it does suggest some relationship between central bank yield and stock returns.
- hluska 10y ago
  I get the impression that you don't know who Aswath Damadoran is. You should look him up - he's one heck of a good writer.
patrickg_zill 10y ago
It is absolutely the case in the USA that the Fed pushed down long term interest rates by their manipulation of shorter term rates, thereby modifying the yield curve. The Fed themselves state this, eg http://www.frbsf.org/education/teacher-resources/us-monetary-policy-introduction/real-interest-rates-economy http://www.frbsf.org/education/teacher-resources/us-monetary... Only the most obtuse person would argue otherwise, for example by claiming that market forces set the rates...but the Fed has truly unlimited credit so only an idiot would bet against them.
- lallysingh 10y ago
  I liked your comment until you said "only the most obtuse person."
  - patrickg_zill 10y ago
    It wasn't meant for you, but for those who argue that the market is the sole determinant of what happens. The Fed is like the engine of a plane, the market the wings. To argue that all you need are wings and the engine is irrelevant, is what too many (on other forums) argue.

retrogradeorbit 10y ago

I disagree with almost everything you said here. And a blogspot link does not prove your point. It's just someone's opinion. Interest rates aren't directly set by central banks, but of course they influence the cost of borrowing for commercial banks. That's why when central bank rates fall, commercial rates fall too. And visa versa. And why when commercial banks don't lower rates in turn there is political pressure to "pass on the savings". As for longer term rates, they do have power over that by selling one maturity of instrument for the purchasing of another maturity. This has colloquially been called "operation twist". I am fully aware of real vs nominal. But I'm curious. How do you know what real rates are if you do not have a consistent, repeatable, uncorrupted measure of inflation?

ucaetano 10y ago
"It's just someone's opinion" In this case it's Damodaran's opinion, so yeah, it matters, like, a lot. "Interest rates aren't directly set by central banks" The "risk-free" interest rate for a country is. All other rates are derived from it (see CAPM). Interest rates for any loan, or cost of capital for any enterprise is the risk-free rate plus the risk premium. "what real rates are if you do not have a consistent, repeatable, uncorrupted measure of inflation?" You can use a lot of proxies for that, and you'll see cases where there are major disagreements between what the market sees as inflation and what the government says it is (see Venezuela and Argentina, for example, http://www.economist.com/node/21548242 http://www.economist.com/node/21548242). That aside, the market usually has a fair trust of statistical institutions that calculate inflation, because that data is quite transparent.
lmm 10y ago
> Interest rates aren't directly set by central banks, but of course they influence the cost of borrowing for commercial banks. That's why when central bank rates fall, commercial rates fall too. And visa versa. And why when commercial banks don't lower rates in turn there is political pressure to "pass on the savings". Sure, but that's all nominal. Real interest rates are necessarily the rate of concrete economic growth; central bank interest rates cannot affect that except to the extent that they actually impact the real economy (i.e. if they make investment easier/harder that can affect real productivity). > I am fully aware of real vs nominal. But I'm curious. How do you know what real rates are if you do not have a consistent, repeatable, uncorrupted measure of inflation? You need a measure of what you value - which is up to you. Whatever that measure is, you can figure out how much value you get by spending money now vs by investing and spending money later. The interest rate is just a consensus/average of those.
lgieron 10y ago
The central bank can set their rate at 1000%, but if no one has any potential investments that can yield 1000%+ returns, companies just won't borrow money. In other words, no one will be getting 1000% returns on their savings. On the other hand, if you'd be willing to lend your savings at say 5%, you might find action.
- mywittyname 10y ago
  People invest in the CB and earn their guaranteed return. This would drive inflation as bonds mature and soon investment returns would eventually look something like (1000 + $realReturn)%. Maybe not at such an extraordinary rate, but Volcker raised rates to 10-21% in the early 80s and US-based stock returns during that era were substantially higher than at any other time. http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/... Referring to that, in the 16 years after the 10 T-Bond return hit a peak of 33% in 1982, stocks yielded over 30% in six separate times. In the next 16 years, from 1999 to 2015, it's done that once, 8 years after a -30% return from the crash of 2008. The S&P also yielded 30+% only twice in the 16 years before 1983. It's not concrete evidence, but it does suggest some relationship between central bank yield and stock returns.
hluska 10y ago
I get the impression that you don't know who Aswath Damadoran is. You should look him up - he's one heck of a good writer.

patrickg_zill 10y ago

It is absolutely the case in the USA that the Fed pushed down long term interest rates by their manipulation of shorter term rates, thereby modifying the yield curve. The Fed themselves state this, eg http://www.frbsf.org/education/teacher-resources/us-monetary-policy-introduction/real-interest-rates-economy http://www.frbsf.org/education/teacher-resources/us-monetary... Only the most obtuse person would argue otherwise, for example by claiming that market forces set the rates...but the Fed has truly unlimited credit so only an idiot would bet against them.

lallysingh 10y ago
I liked your comment until you said "only the most obtuse person."
- patrickg_zill 10y ago
  It wasn't meant for you, but for those who argue that the market is the sole determinant of what happens. The Fed is like the engine of a plane, the market the wings. To argue that all you need are wings and the engine is irrelevant, is what too many (on other forums) argue.