What Are Interest Rates?
An interest rate is the price of borrowing money, shown as a yearly percentage. When rates change, it ripples through loans, savings, bonds and stocks.
Who sets interest rates
In the US, the Federal Reserve sets a key short-term rate that banks charge each other. Other rates, like mortgages and car loans, tend to follow. Longer-term rates are set by the market through bond yields.
How rates affect stocks
- Higher rates make borrowing more expensive, which can slow companies and shoppers.
- Savings and bonds pay more, so stocks look less attractive by comparison.
- Future profits are worth less today. See discounted cash flow.
Who is hit hardest
Fast-growing companies whose profits are far in the future, and companies with lots of debt. Banks can benefit, because they earn more on loans.
When rates fall
The opposite usually happens: borrowing gets cheaper, and stocks often rise. But rates usually fall because the economy is weakening, which can hurt profits.
See it in real companies
Open a company to see what it sells and how it makes money.
Related terms
Federal ReserveThe US central bank.
InflationWhen prices rise and money buys less.
Bond yieldThe return you get from a bond.
Yield curveInterest rates for short and long loans, side by side.
Quantitative easingWhen a central bank buys bonds to push rates down.
RecessionWhen the economy shrinks for a while.