‘Easy Money’ Role Casts Doubt on U.S. Stock Rally: Chart of Day

By David Wilson

April 15 (Bloomberg) -- The latest surge in U.S. stocks may have more to do with historically low interest rates than any rebound in the economy and corporate earnings, according to Peter Boockvar, an equity strategist at Miller Tabak & Co.

As the CHART OF THE DAY illustrates, the Federal Reserve’s benchmark interest rate has been negative since November in real terms, adjusted for inflation. The Standard & Poor’s 500 Index, also included in the chart, showed a 17 percent gain for the period as of yesterday.

The central bank’s target rate for overnight loans between banks, or federal funds, currently stands at minus 2 percent on an inflation-adjusted basis. This figure is based on the upper end of the Fed’s range, zero to 0.25 percent, and the year-to- year change in consumer prices.

Yesterday, the S&P 500 closed above 1,200 for the first time since September 2008. The milestone followed a two-month rally that accounts for most of the index’s advance since the real rate fell below zero.

“What’s real and what’s artificial, what’s organic growth and what’s juiced by easy money” can’t be determined with rates at current levels, Boockvar wrote today in an e-mailed note. The question will only be answered, he added, when rates start to increase and the economy must function “without the crutch of cheap money.”

Futures on federal funds indicate the central bank may abandon its zero-rate policy in November or December, according to data compiled by Bloomberg. The odds of a higher target rate in those months are 51 percent and 69 percent, respectively.

(To save a copy of the chart, click here.)

To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net