Do Higher Interest Rates Predict Lower Stock-Market Returns? Evidence from the U.S. S&P 500, 2000–2025
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This study examines whether the level of the U.S. federal funds rate is associated with annual S&P 500 total returns over 2000–2025. The research combines two public datasets: the annual effective federal funds rate published by the Federal Reserve through the Federal Reserve Bank of St. Louis (FRED), and annual S&P 500 total returns reported by Slickcharts. A simple bivariate ordinary least squares regression is used to estimate the relationship between the annual federal funds rate and annual S&P 500 total return. The estimated coefficient on the federal funds rate is negative (-1.31 percentage points of S&P 500 return for a one-percentage-point higher annual rate), but it is not statistically significant at conventional levels (p = .475), and the model explains only about 2.1% of the variation in annual returns. A second exploratory specification using the annual change in the federal funds rate produces a positive coefficient, illustrating that annual rate changes can be strongly affected by the same economic shocks that move equities and therefore should not be interpreted causally. Overall, the sample provides limited evidence that the annual level of the federal funds rate alone predicts S&P 500 total returns. The findings are consistent with the broader literature showing that stock markets respond to monetary-policy surprises and transmission channels, while also demonstrating why a simple annual regression cannot identify those short-horizon causal effects.
Keywords
Federal Funds Rate, Interest Rates, Macroeconomics, Monetary policy, S&P 500, Stock Market Returns