How Interest Rate Adjustments Affect Stocks
When the Fed announces interest rates the market becomes very volatile. For example, if the Fed lowers interest rates from 4.75% to 4.25% it is presumed business expansion would increase consumer spending as growth created jobs. Businesses in turn can borrow money at a cheaper rate and continue to expand to accommodate all of the new consumer spending. More growth creates more jobs, more jobs fuel more growth. While all of this is going on corporate profits are going up along with the stock prices.
When the Fed determines that the economy is growing too quickly, fueling inflation, it will raise the interest rate. This slows down growth, having the opposite affect on the economy by making it more expensive to borrow money. Higher rates mean slower growth, slower growth means fewer jobs. Fewer jobs slows growth more, business do not need to expand. This hurts company profits and makes stock prices go down.
Investors and analysts look through past economic data to determine where the interest rates will move next. Inflation reports can be a sign as to which direction the market will move next.