Q&A: What Do High Interest Rates Mean For The Stock Market And Economy?

Q&A: What Do High Interest Rates Mean For The Stock Market And Economy?
Theodora Lee Joseph, CFA

about 1 month ago1 min

Question from Anees: What’s the impact of high interest rates on the stock market and the economy?

Answer from analyst Theodora: The US economy, for example, has various interest rates, and the central bank's federal funds (fed funds) rate is a key one when it comes to managing inflation. The fed funds rate directly impacts stocks and the economy, because higher rates can harm stock valuations. Remember: investors often value stocks based on the present value of their future cash flows. When interest rates rise, so does the discount rate used to convert future values into today’s dollars, which means those forward-looking cash flows end up being worth less. Higher interest rates also make it more expensive to borrow money, which reduces corporate and consumer spending and dents economic growth.



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