What changes when the Fed raises or lowers interest rates?
Read everything from FOMC decisions to the dot plot, press conference, and quantitative tightening. Connect the reasons why stock prices might fall even when interest rates are cut.
Table of contents
Remember this first
First, 3 things to remember
- 1An interest rate decision is information that changes not only the current level but also the future path.
- 2The dot plot is a conditional forecast by participants and is not a fixed schedule for rate cuts.
- 3Examine together whether the cause of the cut is price stability or economic deterioration.
What do the Fed and the FOMC do?
The Fed is the central banking system of the United States. The FOMC is the Federal Open Market Committee that determines monetary policy. Regular meetings are typically held 8 times a year, and additional meetings can be held if necessary. It considers both price stability and maximum employment.
The US base interest rate mentioned in the news usually refers to the federal funds rate target range. It is a policy benchmark for the interbank overnight funding market and does not directly set personal loan rates, the US 10-year Treasury yield, or stock discount rates to the same number.
A 25bp hike and a 0.25% point hike mean the same thing
1bp is 0.01% percentage points, and 25bp is 0.25% percentage points. If the target range changes from 4.00~4.25% to 4.25~4.50%, it is a 25bp hike. It does not mean "interest rates rose by 25%".
Check the target range and the magnitude of change in the original text rather than nicknames like big cut or big step. A freeze does not mean there is no change. If the message regarding the number of future cuts or conditions changes, market interest rates may move.
There is more data to read after the interest rate number
Prices immediately after the announcement may change during the press conference. Rather than reading just one headline, distinguish between the stages at which information is released.
| Data | What should you check? |
|---|---|
| Policy statement | Target range, economic assessment, and language on risks and future policy conditions |
| Economic projections and dot plot | Growth, inflation, unemployment, and interest rate judgments by each participant at meetings where projections are released |
| Press conference | Explanation of policy rationale, uncertainties, and conditions to monitor going forward |
| Minutes | Discussions from the time that are released later. Distinguish these from current decisions or new voting results. |
The dots on the dot plot are not a commitment
The dot plot shows the policy rate levels that participants consider appropriate based on their individual economic outlooks. The median is a number that summarizes various judgments and is not a schedule predetermined by the committee. Projections may change depending on future inflation and employment data.
Hawkish is used to describe a focus on inflation control and tightening, while dovish is used for a focus on easing and economic support. Rather than nicknames attached to people or statements, check what has changed from the previous message.
Why might the Nasdaq fall even when interest rates are cut?
Hypothetical scenario A is a cut that occurs while inflation is stable and demand holds up. Reduced financing burdens and expectations of maintained profits may work together. Scenario B is a cut in response to a sharp deterioration in employment and consumption. In this case, profit declines and credit risks may outweigh the effects of the interest rate.
Even if an expected rate cut occurs, the market may be disappointed if the outlook for further cuts recedes. Conversely, stocks may rise on a smaller-than-expected hike or a dovish outlook. Analyze the announcement by breaking it down into the magnitude, the difference from expectations, the rationale for the decision, and the future path.
QE and QT are separate pillars from interest rate decisions.
Quantitative Easing (QE) is a policy that influences long-term interest rates and financial conditions through central bank asset purchases. Quantitative Tightening (QT) can be described as the process of reducing holdings of securities, such as by reducing the reinvestment of maturing assets. You must check the official plan at the time for specific targets, limits, and schedules.
Rate cuts and balance sheet reduction can occur simultaneously. However, there is no established calculation that a specific change in Fed assets leads to a specific movement in stock indices. Bank reserves, funding demand, and market adjustments work together, and there are time lags and uncertainties regarding the effects.
You should not make such assumptions
“If the Fed cuts interest rates, the Nasdaq always goes up.”
You need to consider whether a cut was already expected, the extent of the economic downturn, and how the outlook for future interest rates has changed.
Check what you have read.
- Did you accurately read the target range and the basis points?
- Have you distinguished between decisions and outlooks?
- Have you verified the reasons for the cut or hike?
- Did you interpret the dot plot as a fixed schedule?
Apply what you read to the actual screen
Try it on WAPE
Source and scope of verification
Reviewed · Version 1
- Monetary Policy: What Are Its Goals? How Does It Work?New window
Federal Reserve · Verify 2026-10-20
Transmission channels of monetary policy to borrowing costs, asset prices, exchange rates, consumption, and investment · The relationship between future policy expectations and long-term interest rates; this is not data for predicting the direction of specific indices - FOMC meeting calendars, statements, and minutesNew window
Federal Reserve · Verify 2026-10-20
Regular meetings 8 times per year, with additional meetings as needed · Access paths for original statements, press conferences, economic outlooks, and meeting minutes. - September 16, 2026: FOMC Projections materialsNew window
Federal Reserve · Verify 2026-10-20
Projections and uncertainties based on individual participants' assumptions of appropriate policy · This material explains the nature of the dot plot and does not use past projections as current interest rates - What is inflation, and how does the Federal Reserve evaluate changes in the rate of inflation?New window
Federal Reserve · Verify 2026-10-20
The long-term 2% inflation target is based on the annual change in the headline PCE price index · Evaluate various inflation data together - Treasury Term PremiaNew window
Federal Reserve Bank of New York · Verify 2026-10-20
Decomposition of government bond yields into expected short-term rates and term premiums · Premiums are model estimates, not directly observable values.
This is educational material for observation and information comprehension. Hypothetical examples do not represent actual stocks or performance and do not provide buy or sell recommendations.