cks to do so.
Companies which have high capital resource requirements can be hurt in the stock market when interest rates increase because their cost of funds increases, as well. Potential investors may be put off because they feel that the company will have too much indebtedness and will have high loan service costs associated with its activities. However, the market as a whole can react favorably even to increases in interest rates if it perceives that such increases are in the best interests of the economy as a whole and will result in a better economic environment.
Interest rates have crept steadily upward since the early 1990s, beginning in 1992 and continuing through early 1995. During this time, the Fed was concerned that the nation's economy was growing too quickly as it came out of a recession. By increasing interest rates, the Fed hoped to balance the need for growth with the need to let the country completely emerge from the economic downturn it previously experienced. In July 1995, the Fed changed its policy for the first time since 1992 and issued a decrease in the discount rate. The following chart illustrates the increases in the discount rate (the interest rate charged to member banks) from 1992 to early 1995:
There are many measures of the stock markets, but two are considered here. The Dow Jones Industrial Average (DJIA) is compiled by the Dow Jones Company (which publishes the Wall Street Journal, and is based on the performance of 30 companies in the industrial sector. This is a complicated formula, but is used to gauge the performance of the New York Stock Exchange as a whole, and is the most widely reported of the various market measures. The Standard & Poor 500 composite index (S&P 500) is a similar grouping of companies, but uses 500 companies instead of 30. As with the DJIA, the S&P 500 is compiled by an independent company (Standard & Poor's) and is a measure of the New York Stock Exchange. ...