As our crazy 24-hour news cycle continues to spin, you’re probably hearing the words “The Fed” a lot these days. “The Fed” stands for the Federal Reserve, and it is the central banking system for the United States. The Fed has a great deal of influence over interest rates, which in turn impact the cost of borrowing money in the U.S.

The current buzz is happening because they are not cutting those interest rates—called the “Discount Rate”—even though the President is asking for cuts. I’m not here to comment on the political side of that, but as investors we should look at how changing interest rates might impact the economy, businesses, and the stock market.

Lower interest rates usually mean cheaper borrowing for consumers, businesses, and the government. This can stimulate the economy in a variety of ways:

– Businesses invest more, since the cost to borrow money is lower.

– Consumers spend more, since lower rates for mortgages, car loans, and credit cards leave people with additional money to spend. For example, when mortgage rates fall, a homeowner might refinance and save hundreds of dollars each month, which can be spent elsewhere in the economy.

– The government spends on the national debt, since interest payments are lower when rates are lower.

Lower rates can also boost the value of companies and their stocks. A company’s value is based on the profits it’s expected to make in the future. If lower rates also indicate lower inflation (they sometimes do), then future profits are more valuable. In this scenario, the company may be worth more because of the lower rates.

As a caveat, stimulating the economy when there is already inflationary pressure can lead to more inflation. This, in turn, would tend to reduce the value of companies. It really is a fine line that The Fed needs to walk when determining their interest rates!

Investors need to understand that changing interest rates impact companies differently. Small businesses often rely more on borrowing than do larger firms, so they might feel an outsized impact from rate changes. High-growth companies are similarly sensitive to rate changes, because their valuations depend more heavily on future earnings as compared to other businesses. The impact on other companies may very much depend on their financial structure.

There is no exact science to predict how stocks will do when interest rates are changing. Markets dropped in 2022 as interest rates increased, but then thrived in 2023 and 2024 despite interest rates holding relatively steady. But the guidelines above can at least provide some color into the markets and expectations.

However you choose to handle interest rate variability, invest smart and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Returns are not guaranteed and past performance does not guarantee future results. Consult your financial advisor before purchasing any security.