Interest Rate (Federal Funds Rate)

The rate at which the Federal Reserve lends money to banks, influencing borrowing costs economy-wide.

What Is the Federal Funds Rate?

The federal funds rate is the interest rate at which banks lend to each other overnight. Set by the Federal Reserve, it's the most important interest rate in the world because it influences all other borrowing costs — mortgages, car loans, credit cards, and corporate debt.

How Interest Rates Affect Stocks

• Higher rates: Increase borrowing costs for companies, reduce consumer spending, make bonds more attractive relative to stocks, and lower the present value of future earnings in DCF models. Generally bearish for growth stocks.
• Lower rates: Reduce borrowing costs, encourage spending and investment, make bonds less attractive, and increase the present value of future earnings. Generally bullish for stocks, especially growth companies.

Rate Decisions and Earnings

Fed rate decisions can dramatically affect which sectors beat earnings. Banks benefit from higher rates (wider lending margins), while real estate and utilities suffer (higher borrowing costs). Tech companies are particularly sensitive to rate changes because their valuations depend heavily on discounted future cash flows.