Lesson 7 of 8
How the Fed Moves Markets
The most powerful force in finance
Fed funds rate
3.50-3.75%
April 2026
Fed balance sheet
$6.5T
down from $8.9T peak
10yr Treasury
4.34%
benchmark for everything
The Federal Reserve sets the short-term interest rate. When they raise it, borrowing gets expensive and stocks usually drop. When they cut, money flows and stocks usually rally. Every investor watches the Fed.
Fed cuts rates
Cheaper to borrow money
Companies invest more, hire more
Stock valuations go UP
Bonds rally (prices up, yields down)
Fed raises rates
More expensive to borrow
Companies pull back, growth slows
Stock valuations go DOWN
Bonds sell off (prices down, yields up)
How sectors actually react to rate changes
Tech Sector
Rates up = tech down. Growth stocks discounted harder. Lost 35% in 2022.
Financials
Banks make more on loans when rates rise. Profit from the spread.
Utilities
High-dividend "bond proxies." Sold off when bonds became competitive.
Real Estate
Mortgage rates up, property values compress, REITs fall. 2022 was brutal.
Energy
Rising rates often correlate with inflation. Oil and commodities win.
Rule of thumb: growth and rate-sensitive sectors hurt in a hiking cycle, value and financials outperform. It reverses in a cutting cycle.
SPY 5 years. Notice how the market reacts around Fed rate decisions. The 2022 drop was driven by aggressive rate hikes.
don't fight the Fed
This is the oldest Wall Street saying for a reason. When the Fed is cutting rates, be bullish. When they're hiking, be cautious. It's not always right, but it's right more often than not.
Check yourself
What typically happens to stock valuations when the Fed raises interest rates?