The interest rate decision will be announced today at 9:00 Mecca time
What is the federal funds rate?
The federal funds rate, also known as the federal funds rate, is the rate at which commercial banks lend money to each other on a short-term basis, usually overnight. The United States Federal Reserve sets a target range for this rate and uses monetary policy tools to keep it within this range. This rate is critical because it affects many other interest rates in the economy, including rates for mortgages, credit cards, and business loans.
The effect of the federal funds rate on the stock market
Borrowing costs:
When the Fed raises interest rates, the cost of borrowing for companies rises, which can reduce their net profits and cause stock prices to fall.
Consumer spending and investment:
Higher interest rates mean consumers will pay more for their loans, reducing their ability to spend. This can slow economic growth, negatively impacting the stock market. Conversely, low interest rates encourage borrowing and spending, which boosts economic growth and stock prices.
Expectations and Feelings:
Interest rate decisions also affect investor expectations and market sentiment. An increase in interest rates may be interpreted as an attempt to curb inflation, which could worry investors and lead to selling of stocks. On the other hand, lowering interest rates may be interpreted as an attempt to stimulate the economy, which encourages investors to buy stocks.
Discounted Cash Flow (DCF) Valuations:
Financial analysts use discounted cash flow models to value companies, which take interest rates into account. Higher rates reduce the present value of future cash flows, which can cause stock prices to decline
• a summary
The federal funds rate is a key instrument of monetary policy and has significant effects on the economy and the stock market. The Fed's decisions can affect borrowing costs, spending levels, and overall market sentiment, affecting stock performance. Understanding these dynamics can help investors make more informed decisions in response to changes in interest rate policy.