How Fed Decisions Move Stocks, Bonds, and Currencies

A single Fed rate decision impacts stocks, bonds, and currencies at the same time. That’s why "the Fed" grabs so many headlines. For stocks, higher rates lower valuations in two ways: first, they reduce a company's future profits in today’s dollars. This is known as a higher "discount rate" in valuation models. Second, they make safer, risk-free bonds more appealing than stocks, leading some investors to shift their capital away from equities. This isn't the same for all stocks. Growth companies, which rely heavily on profits expected far in the future, are more sensitive to rate changes. Value stocks, on the other hand, tend to have cash flows concentrated in the present, so they are less affected by rate adjustments.

For bonds, the connection is straightforward: bond prices and interest rates move in opposite directions. When rates go up, existing bonds issued at the lower fixed rate become less appealing compared to new bonds that offer higher rates. Their prices drop until their yields align with the new market rate. For currencies, higher U.S. rates compared to other countries usually attract foreign capital seeking better returns on dollar-denominated assets. This increases demand for dollars and strengthens the currency's value against others.