Interest rates are one of the most closely watched levers in the financial world—and for good reason. A single decision by the Federal Reserve can ripple outward, influencing everything from mortgage rates and credit cards to job growth and stock market performance.

But how exactly do interest rates affect the economy? And why does the stock market sometimes react in ways that seem completely counterintuitive?

With the Fed’s September meeting around the corner, it’s a good time to take a closer look at how interest rates interplay with markets and the economy.

In the current interest rate climate, people ask:

• “Should I wait to buy a home, or will mortgage rates finally come down?”
• “If the Fed cuts rates, does that mean the stock market will jump up right away?”
• “We’ve been sitting on cash—should we invest now, or wait until after the announcement?”

These questions highlight something important: interest rate decisions don’t just move markets—they influence the everyday financial choices people make.

The Basics: What Interest Rates Actually Do

At their core, interest rates represent the cost of borrowing money. When rates rise, borrowing becomes more expensive for businesses and consumers. That tends to slow spending and investment, which can cool inflation and economic growth.

On the flip side, when rates fall, borrowing becomes cheaper. Businesses often expand, consumers spend more, and the economy generally gets a boost.

Consider this:  a couple is debating whether to move forward on a home renovation or push it to next year. They’ve seen construction loan rates climb, and they wonder if a possible Fed cut in September could make it cheaper. This is an example of how even a small rate adjustment can influence personal decisions.

How Interest Rates Affect the Economy

Interest rates influence nearly every corner of the economy. Higher rates tend to reduce spending on big-ticket items like homes and cars, and businesses may postpone hiring or expansion projects if they anticipate slowing economic growth. This slowdown can have the intended effect of slowing inflation but can also reduce demand across industries. Lower rates, on the other hand, making borrowing cheaper can encourage spending, and may stimulate business investment, helping the economy expand.

How the Stock Market Responds

Here is where things get interesting. It might seem logical that higher rates (which slow the economy)  might cause stocks to fall—and sometimes they do. But markets don’t just react to what’s happening today. They react to expectations about what’s ahead.

If investors see higher rates as a sign the economy is running too hot, they may worry about inflation, and stocks can drop. But if they view rate hikes as a vote of confidence in economic growth, markets may rally. Similarly, when the Fed signals that rate hikes are ending, markets often respond positively—even if the broader economy is still slowing.

The relationship is complex, and market moves are often driven by numerous factors, not just the anticipated level or direction of interest rates.

What We’re Watching Now

As we head into mid-September, the Fed is balancing two competing pressures: slowing employment growth and stubborn pockets of inflation. That uncertainty is why we’re hearing questions like:

• “Should I lock in higher interest rates on my bond portfolio before they drop?”
• “Is now the time to refinance my mortgage?”
• “Does this change our retirement income strategy?”

Our advice? Big decisions — whether in your portfolio or personal finances — shouldn’t hinge on a single Fed meeting. Rates may go up or down, but your long-term strategy should be built for flexibility and resilience through these cycles.

Want to Go Deeper?

If you’ve ever wondered why markets sometimes move in surprising ways, you won’t want to miss our upcoming Ripple Event, Markets and the Economy: Intersections and Insights on Tuesday, September 23, 7:30 a.m. – 8:30 a.m.

Our panel featuring local economist Scott Bailey, our Portfolio Manager, Lynn Snyder, MBA, CFA®, and Heidi Johnson Bixby, CFP®, will explore what drives the stock market versus what drives the economy, how they intersect (and diverge), and what market movements can signal for our region.

Register Now to reserve your seat, spots are limited!