What Are Fed Interest Rates, and Why Do They Affect Stocks?
If you have ever listened to the news, skimmed a news app, or (if you’re really old) read a paper, odds are you’ve seen a title such as: “Fed cuts rates by x%” or “Fed raises rates by x%”. But these headlines are easy to ignore because they’re boring. Something less boring though, is how these decisions massively affect the stock market. Let’s dive in.
Introduction to the Fed
The Federal Reserve has the ability to raise or lower the Federal Funds Rate – the interest rate banks charge each other for overnight loans. So the Fed’s job is to set a target range for this rate and evaluate it via eight annual meetings. This may sound like it’s above the average American’s pay grade; if it’s between the American government and the banks, what would it have to do with your average working citizen? Well, because it has to do with the banks and the American government, these rate changes have everything to do with you. They change the interest rates in the economy as a whole: mortgages, loans, savings APY, etc. In simple terms, the Fed has the ability to make money “cheaper” or more “expensive” for the banks. Whatever treatment they get is then distributed to you!
Why Change The Federal Funds Rate?
A very natural question, and in short it’s to support economic growth. However, this is a lot more complicated then only raising or only lowering interest rates, as you could imagine. When there’s a need to fight inflation because it is growing so much, the Fed will often raise rates. Inversely, if the economy slows and people are spending less money and saving more, the Fed will often lower rates. This information is extremely predictable. If you notice that things are getting more expensive at the grocery store, you see less people buying houses, more people saving their money, these are all hints that the Fed may take action to combat this.
What Does This Mean For the Stock Market?
After all of this nerdy economic terminology, we need to speak about something that everyone on Monk Investments comes to read over, stocks. These Fed rate changes affect the market in the short to medium term, but never in the long. The general market reaction to the Fed raising rates is bad news, since: consumers will be spending less, it costs more to borrow money, and the cycle of money slows. On the other hand, the Fed cuts rates and stocks tend to be happy for the exact opposite reasons: consumers are willing to spend more, it’s cheaper to borrow money, and money is flowing faster than it was before. Unfortunately, this dance of raising and lowering rates is subject to the needs of the economy, not the stock market. The stock market is just along for the ride.
Conclusion
All in all, the Fed is a very important part of how the market will move throughout the year. However, as mentioned before, it almost never affects the long-term. Don’t be overly concerned with a normal ping-ponging Fund Rate. Remember that the market adjusts and recovers, like it did in 2001, 2008, 2020, and again as we saw in early 2025.
This breakdown of how the Fed's rate decisions ripple through the economy is spot on. What strikes me most is that timing aspect you mentioned people can actualy see these changes coming based on everyday indicators like grocery prices or housing activity. The short to medium term market reactions are predictble, but your point about the long term resilience of the market is reassuring.