The Fed changes rates: how does this affect stock market quotes

An Important Event Is Coming — On June 12 at 18:00 (UTC), the Federal Reserve will announce its decision on the key interest rate. This event traditionally becomes one of the most significant for stock market participants and the cryptocurrency sector. But why does the decision of the American reserve system generate such interest? Let’s find out.

What is behind the name “Fed rate”?

When talking about the Fed rate (federal funds rate), it refers to the cost of borrowing between banks. Commercial financial institutions lend to each other for short periods — most often overnight. The Federal Reserve sets a target corridor for this rate and uses various monetary policy mechanisms to keep it at the desired level.

Why is this important? Because this “benchmark price” for interbank lending becomes the basis for calculating many other rates: from mortgage interest to credit card fees and business loans.

What does the Fed rate influence: four main channels of impact

First channel — borrowing economy

If the Fed raises the interest rate, it becomes more expensive for companies to borrow. Debt servicing costs increase, squeezing profit margins. The logical result: investors reevaluate stock prices downward as expected earnings decrease. Conversely, lowering rates attracts buyers to the stock exchange.

Second channel — consumer and investor behavior

Expensive loans halt consumer demand. People borrow less for mortgages, postpone large purchases, and cut expenses. This slows economic growth, putting pressure on the stock market overall. Cheap money, on the other hand, stimulates activity: citizens spend, businesses invest, stocks rise.

Third channel — market psychology and expectations

An interest rate hike is often interpreted by the market as a signal: “the central bank is concerned about inflation.” This causes caution, increasing the desire to get rid of risky assets. Demand for stocks drops, and a sell-off begins. If the Fed cuts rates, it is read as “support for the economy,” and investors are full of optimism.

Fourth channel — revaluation of future cash flows

Financial analysts evaluate companies using the discounted cash flow model. In this model, the rate acts as a discount — the higher the percentage, the lower the present value of future profits. High rates automatically reduce the fair value of stocks, while low rates increase it.

Practical significance for traders and investors

Fed decisions directly translate into capital behavior. Announcements of rate hikes can trigger a wave of sell-offs. Announcements of rate cuts or pauses often initiate an upward trend. Those who understand this mechanism are prepared for volatility and make more balanced decisions.

Follow macroeconomic events — they determine the direction not only of the stock market but also of the cryptocurrency sector. #bitcoin #altcoins #FedRateDecisions