I will let you guess where we are in this “cycle”.
Within a fractional reserve banking system, if the Federal Reserve decreases the discount rate and the rate is lower than the long bond rate by enough of a spread, the banks get motivated to borrow at or close to the discount rate and loan it to the bond market.
Fed decreases rates and thus makes money low-cost; then the money goes from the Fed to the banks, and the banks borrow at a low rate; so, they can lend to the risk-free bond market.
As the interest rates drop, the outlook for the net profits of companies gets better, as their largest expenditure, financing, is dropping, too.
Rapidly, a part of the money goes out of the bond market because investors sell bonds for profit and start to invest it in the equity market as a result of the improving outlook for companies.
Hence the money moves from the Fed to the banks, then to the bond market and to the stock market, and, finally, to the real economy.
Stock market is regarded as the leading indicator of the economy, while the stock market is the most significant factor of the government’s leading economical indicators, mainly because the liquidity that moves through the whole economy, firstly hits the stock market and then the real economy.
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