The Price of Money
If you learn only one topic from this course, make it this one. Interest rates sit at the center of almost every index move.
What interest rates are
An interest rate is the price of money — what a lender is paid, or a borrower pays, to move money through time. The Fed sets a benchmark policy rate (the federal funds rate), which then influences the rates banks, businesses and consumers pay throughout the economy.
Why rates move stock indices
A stock's price reflects what investors will pay today for a claim on that company's future earnings. The market discounts those future earnings back to a present value — and the interest rate is the discount rate used to do it.
🎯 Lower rates raise the present value of future earnings, supporting stock prices. Higher rates lower it, pressuring them. That's the core mechanical link — and it hits growth and tech stocks hardest, since more of their value sits further out in time.
"Tends to" is doing real work in that sentence. Growth, inflation, earnings and risk sentiment all factor into whether a rate move actually translates into a matching index move — which is why the rest of this course exists.
Real vs nominal rates
The nominal rate is the stated, quoted rate. The real rate subtracts expected inflation from it, and better reflects the actual cost of capital.
📊 A nominal rate of 6% sounds restrictive — until inflation turns out to be 8%. The real rate is -2%: borrowing is still cheap in real terms despite the high headline rate. A 3% nominal rate with 1% inflation (+2% real) can represent tighter conditions despite the lower headline number.
Rate expectations
Index markets react to rates mostly through expectations. A Fed meeting rarely surprises with the decision itself — what moves price is guidance about the future path, and whether it was more or less aggressive than what was already priced in. That's why you'll often see little reaction to the decision itself, and a sharp move during the statement or press conference that follows — that's where the forward guidance lives.
Why the path matters more than the level
What matters most is rarely today's rate in isolation, but where the market expects it to be in six months or a year — and how that expectation is changing as new data arrives.
ℹ️ An index can move even when the Fed does nothing at a meeting, simply because incoming data shifts what the market expects at a future one — e.g. a cooler-than-expected inflation report suggesting cuts arrive sooner than priced in.
Why markets move before the decision
Rate futures and swaps update continuously between meetings as data arrives. If the scheduled decision matches what was already priced in, there's often little left to react to — the bigger moves tend to happen in the days before, as data shifts expectations, and during the guidance for what's next.
🚫 Waiting for the decision to "find out what happens" misses most of the move. The decision confirms or denies what was already priced in; the real shifts happen as that pricing builds beforehand.