Many stock market participants are "Fed" watchers, always keeping one eye on the actions of the Federal Reserve Bank. This is important because there is a strong relationship between the stock market and the level of interest rates.

The Federal Reserve Bank influences the rate of return on fixed income securities (bills, notes, and bonds) by adjusting the Federal Funds Rate. This is a rate of interest charged for loans made between banks in order to meet overnight reserve requirements. All banks are required to have a specific amount of money on reserve. If a bank is unable to meet the reserve requirement, it will borrow from another bank for that overnight period.

As the Federal Reserve System monitors the amount of money in the economic system, they adjust the Federal Funds Rate. When the Federal Funds Rate increases or decreases, interest rates of longer maturity instruments also increase or decrease, to some extent. If the interest rate structure declines, typically, more money will enter the stock market, driving up share prices. Conversely, if rates increase, money will usually leave the stock market, causing prices to decline. This relationship occurs as a result of competition between the two investment classes, that is, fixed income securities versus stocks. When the rate of return on fixed income securities is low, investors become more willing to take on the risk of the stock market.

Low interest rates also help corporations to produce greater profits. Their expenses are reduced by lower rates of interest if they carry debt or borrow during the course of business.