Interest Rates & Inflation & shares?

How are interest rates related to or affected by inflation and vice versa.

Also how do either of these or both affect shares?

Please can you offer any websites that can help further explain the above (ideally with direct links to them)

Thank you x

Interest Rates %26amp; Inflation %26amp; shares?

Short term interest rates are influenced by the fed funds rate, which is set by the Federal Reserve. This rate is the rate at which banks themselves do short term borrowing, and thus has a big impact on the velocity of money. The fed raises and lowers this rate in an attempt to control inflation. Long term rates are set by market forces, largely based on expectations of future inflation. the Fed also has the power to engage in %26quot;free market operations%26quot;, meaning that they can buy or sell treasury securities for the purpose of influencing rates.

Share prices are very difficult to explain in any specific case. But in a very general sense, the current price of a stock can be thought of as the discounted value of future company earnings. As interest rates increase, the present value of future earnings decreases, and thus the share price drops. That%26#039;s why the market hangs on every word Bernanke utters.

Interest Rates %26amp; Inflation %26amp; shares?

Interest rates are controled by fed bank to stablise the economy. when interest rates go higher, people tend to save more %26amp; borrow less, therefore less investment %26amp; more saving, since a guaranteed income from interest is always better than any unknown return from stocks so more tend to keep saving being scared of another increase or uncertainity of the future. (usually house hold mortgages are controlled by variable interest rates as well, so it adds a worry to mum %26amp; dad investors)

once interest rates go higher, investments go lower, less new business open (due to higher cost of borrowing), higher unemployment (due to less new business opening), less spending on credit card %26amp; inflation tends to lower.....due to lower spending of consumers which makes retailers push their products pricing down to attract more customers.

the connection between all that %26amp; shares is in 2 aspects, borowing to invest %26amp; the opportunity cost of trading shares vs putting money in interest account in bank.

if cost of borrowing money to invest in share market gone higher by higher interest then people tend to borrow less %26amp; invest less %26amp; tend to put money in banks to get a chance of higher banks.

I tried to make it as readable as possible so I hope it helps :)

cheers,