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Investing 101: Effects of Interest Rates

WHAT IS THE EFFECT ON THE STOCK MARKET WITH REGARDS TO INTEREST RATE CHANGES?

Interest rates are no doubt important considerations when understanding market correlation, interest rate changes should typically be considered after the investor/trader becomes a little more familiar with the basics of investing. A bolt-on resource effectively. Anyway, simply put, interest rates provide a basis for the cost a company or individual pays for the use of borrowing someone else’s money.

The course is based predominantly on domestic US stocks, so let’s talk FOMC/FED. The FFR (federal funds rate) is the rate at which banks borrow from and lend to one another. For interest rate changes to play its part in the market, it usually spans over the course of a 9–12-month window, due to the ripple effect.

The effect on stock market response is usually faster. Higher interest rates tend to negatively affect earnings and stock prices (with the exception of the financial sector). Lower interest rates tend to positively affect earnings and stock prices, more to follow.

WHEN INTEREST RATES RISE:
When the Fed increases the discount rate, it instantly raises short-term borrowing costs for the financial institutions, banks, funds and the like. The ripple effects take a while to deliver (9-12 months) because of all the further borrowing transactions further down the line to smaller institutions and lenders/borrowers/consumers in an economy.

Same as in any sector and in any business, when products/materials and services increase, this is passed down the chain. Therefore, the larger institutions that are being charged higher rates, these same institutions charge their consumers more to borrow their money.

Now here is where the funnel for reduced stock price kicks in… Individual consumers are impacted through increases to their credit cards and borrowing power, their bills and mortgages become more expensive and their disposable household income is then less that it/>