Why do stock prices rise when the Fed cuts interest rates?

Question

If, when the Fed cuts interest rates, the money supply increases, each dollar is able to buy a smaller fraction of the economy's production. Hence, more dollars are required to buy the same unit of stock. Also, investors who anticipated the cut would transfer their assets from cash to stock to preserve the asset value. Similarly, when the Fed raises rates, cash assets become more attractive than stock.

Is this essentially correct?

Answer 1

Lower interest rates affect stock prices two ways.

If investors think it will stimulate the economy or prevent a recession and therefore increasing expected profits, stocks become more valuable.

Investor allocate their money between assets choosing on the basis of risk and reward. Short term interest, that is "risk free" investment, is compared to the return on stocks. When the risk free rate declines the optimum allocation changes and the demand for stocks increase, causing the price to increase until the return on stocks fall to the new equilibrium value. See CAPM theory at
http://en.wikipedia.org/wiki/Capital_asset_pricing_model

Answer 2

The stock market rises because they believe that consumers (who drive the economy) will be able to borrow more easily for houses, cars, appliances, etc. etc. When consumers buy more of these goods, the companies that produce them ear more. When they earn more, their stock is worth more, so the time to buy the stock is before those earnings kick in and drive dividends and prices higher. In addition, companies will be able to borrow more money to build, expand, create new companies, etc. All of this provide cash for the market.

That's the very simple explanation.

Answer 3

"as a typical rule of thumb, while the Fed cuts costs of activity, this reasons the inventory marketplace to flow up; while the Fed will strengthen costs of activity, this reasons the inventory marketplace as an entire to flow down. (For greater perception, examine How costs of activity impact The inventory marketplace.) it is because of the fact decrease costs of activity make for greater much less costly debt financing, which permits agencies to amplify their operations employing debt capital at a decrease fee. the expansion boosts the economic device. Conversely, greater costs of activity tend to chill out off the economic device, that could decrease inventory valuations"

Answer 4

When the interest rate is lowered people have more money.

When people have more money they can afford to buy more stock.

When people buy stock the prices rise.

That's the simple answer. I'm sure someone else can go into more depth for you.