How interest rates move everything
A rate is the price of the future. Raise it and everything whose value sits in the future is worth less today.
Understand why a quarter-point decision in a committee room moves trillions.
How interest rates move everything works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
One number, four consequences
A rate is the price of the future. Move it, and everything whose value sits in the future is repriced, which is why growth companies fall hardest.
- 1
The rate is the price of time
An interest rate is what it costs to have money now instead of later. When the central bank moves it, it is moving the exchange rate between the present and the future, and every asset is priced off that.
- 2
Bonds reprice first, and mechanically
If new bonds pay 5% and yours pays 2%, yours is worth less. Nobody has to decide this, it simply follows. The longer the bond, the more violently it moves, which is why 'safe' government bonds delivered brutal losses when rates rose.
- 3
Then shares, through the discount rate
A company is worth the cash it will produce, converted into today's money. The rate is the converter. Raise it, and cash arriving in 2040 is worth less today, so the company is worth less today, even though nothing about the company changed.
This is why fast-growing companies fall hardest when rates rise: almost all of their value sits far in the future, which is exactly the part being discounted more harshly.
- 4
And finally, through the economy itself
Higher rates make mortgages and corporate borrowing dearer, which slows spending, which slows earnings. That is the intended effect, and it arrives with a lag of roughly a year, which is why central banks are always accused of being late.
You can explain why a profitable company with no debt still falls when rates rise.
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A rate is the price of the future. Raise it and everything whose value sits in the future is worth less today.
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