Who sets rates?
In the US, the Federal Reserve sets a target for the short-term rate banks charge each other. It raises it to cool inflation and lowers it to support growth. That rate influences borrowing costs for mortgages, loans and businesses. Longer-term rates, like the 10-year Treasury yield, are set mostly by the market. Meeting dates and data releases are on our economic calendar.
Bonds
When market rates rise, existing bonds that pay lower rates become less attractive, so their prices fall. When rates fall, their prices rise. Bonds with longer maturities swing more. This seesaw is why a bond fund can lose value in a year when rates climb.
Stocks
Higher rates affect stocks in several ways. Companies pay more to borrow, which can reduce profits. Safe alternatives such as Treasury bonds and savings accounts become more attractive, so investors may demand more from stocks. And a company’s future profits are worth less in today’s money when rates are higher, which tends to hit fast-growing companies whose profits are far in the future. Falling rates tend to work the other way.
These are tendencies, not rules. Stocks respond to growth and profits too, and sometimes rates rise because the economy is strong, which can help.
Sector sensitivity
- Financials: banks can benefit from higher rates up to a point, but suffer if borrowers struggle.
- Real estate and utilities: carry a lot of debt and pay steady dividends that compete with bond yields, so they are often seen as rate-sensitive.
- Technology and growth: valued on distant profits, so sensitive to the discount rate.
- Consumer and housing-related names: affected by loan costs for customers.
Why it matters to you
You do not need to predict the Fed. But knowing the link helps explain why a market can move on a single central bank statement, and why a balanced portfolio holds more than one kind of asset. Explore how each part of the market behaves on our sector pages.