How Interest Rates Impact the Stock Market, Ripple Effect on U.S. Economy

How Interest Rates Impact the Stock Market, Ripple Effect on U.S. Economy

As a small business owner, you know that numerous factors influence the economy. The stock market and federal interest rates are just two examples. Imagine for a moment that the Federal Reserve changes interest rates on the first day of next month. It wouldn’t be long before that change trickled down to the rest of the economy.

In a best-case scenario, the Federal Reserve would lower interest rates and stimulate business. When a bank or credit union can lend money to customers for less, more people are apt to apply for loans to help pay for homes, cars, and other large expenses. Greater consumer spending is good news for the economy overall.

Stock Markets Go Up When Interest Rates Go Down

When people hear about a favorable interest rate change coming up or see that one has already taken place, they tend to be more willing to invest in stocks. Investors also see that people will begin spending more money on goods and services they may have held off on buying, and that companies will begin increasing production in response to this demand.

Lower federal interest rates are especially good for the stock market because it encourages both current and potential investors. United States Treasury Bonds are a good example of this because the interest rate paid on these bonds is closely associated with the federal interest rates. When the latter goes down, these bonds pay less than other stock options with a slightly higher risk potential. People are more willing to take that risk in hopes of a better payout. As investors’ money enters the stock market, it raises prices and profit for those stocks and contributes to a healthier economy.

Lower Interest Rates and the Foreign Exchange Market

When the Federal Reserve lowers interest rates in the United States, it also drops the dollar’s value in the foreign exchange market. This isn’t good in the long-term, but it can have a positive short-term impact on the national economy. That is because individuals and businesses turn more to domestic manufacturers to purchase the products they need, which in turn puts more money into the local economy.

Small Business Owners Should Pay Attention to Interest Rates and the Stock Market

Banks, investors, and other lenders frequently analyze the actions of the Federal Reserve to determine how to make federal interest rates most advantageous to them. It’s not a bad idea for small business owners to do this also since it can forewarn about inflation and decrease in consumer spending. However, Aura Wealth Advisors understands that this can get complicated. We are here to support your business however we can, including assisting you with interpreting federal interest rates and getting your company into the best possible financial position.

Leave a Reply