Interest Rate
Quick Answer
The cost of borrowing money, expressed as a percentage of the principal loan amount.
How Interest Rates Work
Interest rates represent the 'price' of money. When you borrow, you pay interest; when you lend or save, you earn interest.
Key Relationships: - Higher rates → More expensive to borrow → Less spending/investment - Lower rates → Cheaper to borrow → More spending/investment
Central banks use this relationship to influence economic activity.
Impact on Markets
Stocks Higher rates reduce the present value of future earnings, often pressuring stock prices. Growth stocks are especially sensitive.
Bonds Bond prices move inversely to interest rates. When rates rise, existing bond values fall.
Currencies Higher rates typically strengthen a currency as investors seek higher yields.
Real Estate Mortgage rates directly impact home affordability and housing demand.
Trading Rate Decisions
FOMC Meetings The Federal Reserve announces rate decisions 8 times per year. Markets often move significantly on these announcements.
Expectations Matter Markets price in expected rate changes in advance. Surprises cause the biggest moves.
Dot Plot The Fed's projection of future rates. Changes in the dot plot can move markets even without an actual rate change.