The Federal Reserve (“FED”) adjusts the interest rates in response to what is going on with the economy. One of the main indicators affecting the FED’s decision of whether or not to raise interest rates is the unemployment rate. During periods of strong economic growth and falling unemployment, the Fed tends to raise interest rates in order to cool wage growth and slow inflation.  In contrast, officials are more likely to lower rates during a weakened economy in order to spur economic growth.

In 2022, the FED increased interest rates seven (7) times. In a one year period, interest rates went from 0.25% to 4.5%.  Interest rate hikes can affect everything from consumer spending and business activity to the stock market and unemployment rate. The theory is that as it becomes more expensive to borrow money, consumers and businesses should spend less. Rate hikes could ignite a recession, resulting in more people being laid off. This could create a growing concern about losing jobs, which could result in people pulling back on spending and harming economic growth. 

Increased interest rates also affect the Stock Market. Understanding the relationship between interest rates and the stock market can help investors understand how changes may impact their investments. By increasing the interest rate, the FED is effectively attempting to shrink the supply of money available for making purchases. This, in turn, makes money more expensive to obtain. Because it costs financial institutions more to borrow money, these institutions often pass these increases onto their consumers. These consumers still have to pay their bills. When those bills become more expensive, households are left with less disposable income. When consumers have less discretionary spending money, businesses' revenues and profits decrease. This not only affects the price of stocks, but the ability for consumers to invest in the stock market. 

If enough companies experience declines in their stock prices, the whole market, or the key indexes many people equate with the market—the Dow Jones Industrial Average, S&P 500, etc.—will go down. With a lowered expectation in the growth and future cash flows of a company, investors will not get as much growth from stock price appreciation. This can make stock ownership less desirable. Furthermore, investing in equities can be viewed as too risky when compared to other investments.

Tickers to consider:  CEI &  MARK

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