Why Does the Stock Market Drop When the Fed Raises Rates?

Why Does the Stock Market Drop When the Fed Raises Rates?

There's a great deal of conversation happening now about the Federal Reserve's intention to raise interest rates. If you've heard about these announcements or even all of the speculation leading up to them, you may be wondering what it means to you. It's perfectly fine to be concerned about these changes especially if you notice the value of your portfolio changing in the short term. But, it also helps to understand the connection between the Federal Reserve and the stock market? How does one relate to the other?

What You Need to Know About the Fed

The Federal Reserve is the big bank in the U.S. The decisions this bank makes impact a great deal of financial matters within the country. In fact, the Fed's job is to help keep the country on a path towards financial stability. There are plenty of politicians that will tell you how corrupt it is. There are others that will tell you it is not. The bottom line is, the Fed's decisions will impact what happens to your portfolio because they directly impact the stock market's investors.

The stock market is not directly impacted by the Fed.

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How the Federal Reserve Works

How the Federal Reserve Works

Have you ever taken a close look at paper money? Each U.S. bill has the words “Federal Reserve Note” imprinted across the top.¹

But many individuals may not know why the bill is issued by the Federal Reserve and what role the Federal Reserve plays in the economy. Here’s an inside look.

The Federal Reserve, often referred to as the Fed, is the country’s central bank. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system.² Prior to its creation, the U.S. economy was plagued by frequent episodes of panic, bank failures, and limited credit.

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