Step through
Rate hikes make borrowing more expensive. Companies invest less, consumers spend less, economic growth slows. Stocks typically fall.
Rate cuts make borrowing cheaper. Companies expand, consumers spend more, growth accelerates. Stocks typically rise.
The transmission mechanism: Fed funds rate flows to Treasury yields, then to mortgage rates, corporate bonds, and eventually to stock valuations via discount rates.
Compare
| Rate Environment | Winners | Losers |
|---|---|---|
| Rising rates | Banks (wider margins), cash, short-duration bonds | Growth stocks, real estate, long-duration bonds |
| Falling rates | Growth stocks, real estate, long-duration bonds | Banks (compressed margins), savers |
| Stable rates | Broadly supportive of equities | Volatility traders (less to trade) |
Try it
Check the **yield curve** in the Markets view. A flat or inverted curve (short-term rates above long-term) has historically preceded recessions.
Key insight
Check-in
The Fed pauses rate hikes after 12 months of aggressive tightening. Inflation prints are cooling but still above target. What happens to the 10-year Treasury yield in the following 6 months?
Check your understanding
Sit with the ideas.
The Fed holds rates steady at 5%, but changes one word in its statement from ‘restrictive’ to ‘sufficiently restrictive.’ Stock futures immediately rally 1.5%. Why would a single word cause this?
Why: