🎯 In 30 seconds: Stocks are claims on future profits, and the economy shapes both the profits and how much investors pay for them. The Federal Reserve sets short-term interest rates to keep inflation near 2% and employment high. Higher rates make future profits worth less today and make bonds more attractive, which tends to push stock prices down. Markets react to economic reports mainly when they differ from what was expected. And the stock market is not the economy: it looks ahead, and it can rise in bad times or fall in good ones.
The Federal Reserve and interest rates
The Federal Reserve (the Fed) is the US central bank. Congress gave it two goals, often called the dual mandate: maximum employment and stable prices. The Fed says it aims for inflation of 2% over the longer run, measured by the PCE price index.
Its main tool is the federal funds rate, the rate banks charge each other for overnight loans. The Fed's rate-setting committee, the Federal Open Market Committee (FOMC), holds eight scheduled meetings a year and announces a target range for that rate.
Today's numbers: the Economy tab on the site's News and economy page shows the current fed funds rate, updated from official data. The Fed's own site lists its meeting dates and every statement.
The federal funds rate ripples out to everything else: credit cards, car loans, mortgages, business loans and the yields on Treasury bills and bonds.
How rates reach stock prices
Rates affect stocks through three channels:
- Company profits. Higher rates raise borrowing costs for companies and their customers. Spending on houses, cars and equipment slows.
- Competition from bonds. When a safe Treasury bond pays 5%, investors demand more from risky stocks. The News and economy page shows today's 10-year Treasury yield.
- Discounting. A stock's value is today's value of all its future cash. Higher rates shrink today's value of distant cash the most. That is why long-dated growth stocks tend to be the most rate-sensitive (see Growth vs value).
Here is the third channel with numbers. A simple valuation formula for a steady business, called the Gordon growth model:
Value per share = next year's cash per share / (required return - growth rate)
The required return is the yearly return investors demand to own the stock. It is roughly a safe interest rate plus extra pay for risk. Take a hypothetical company that will pay out $4 per share next year, growing 3% a year after that.
| Required return 8%: $4 / (0.08 - 0.03) | $80.00 |
| Required return 9%: $4 / (0.09 - 0.03) | $66.67 |
| Change in value | -16.7% |
Nothing about the company changed. Only the rate investors demand rose by one point, and the fair value fell by a sixth. The formula breaks if growth is close to the required return, which is a hint at how sensitive long-term valuations are to small changes in assumptions.
Inflation: CPI and PCE
Inflation is the rise in the general price level. Two main measures:
- CPI (Consumer Price Index), from the Bureau of Labor Statistics (BLS), monthly. It tracks prices urban consumers pay. Core CPI leaves out food and energy, which jump around, to show the underlying trend.
- PCE price index, from the Bureau of Economic Analysis (BEA), monthly. It covers a broader set of spending and is the measure the Fed's 2% goal uses.
Today's numbers: the News and economy page shows the latest CPI, core CPI and core PCE readings, each measured against a year earlier.
Why stocks care: inflation above target pushes the Fed toward higher rates, which hits valuations. It also squeezes companies that cannot raise prices as fast as their costs rise. Companies with strong pricing power suffer less (see Qualitative analysis).
Jobs and GDP
The Employment Situation report, the "jobs report", comes from the BLS, usually on a Friday early in the month at 8:30 a.m. Eastern. It combines two surveys: a survey of households (which gives the unemployment rate) and a survey of employers (which gives the change in nonfarm payrolls, the number of jobs).
Today's numbers: the News and economy page shows the latest unemployment rate and the monthly change in payrolls. The BLS posts the release dates on its site.
Gross domestic product (GDP) is the total value of goods and services the economy produces, reported quarterly by the BEA as an annual growth rate and revised as more data arrive. The News and economy page shows real GDP growth compared with a year earlier. News reports usually quote the BEA's quarter-over-quarter figure at an annual rate, which is a different number, so check which one you are reading.
Markets often react in ways that look backwards. A very strong jobs report can send stocks down, because it raises the odds of higher rates. A weak one can send them up for the opposite reason, until weakness starts to look like a recession. What moves prices is the surprise compared with the forecast, and what that surprise means for the Fed.
The yield curve
The yield curve plots Treasury yields from short maturities (a few months) to long ones (30 years). Normally it slopes upward: lenders want more to tie up money longer.
When short-term yields rise above long-term yields, the curve is inverted. That usually happens when the Fed holds short rates high and investors expect rates, growth or inflation to be lower later. Inversions have often come before US recessions, which is why the curve gets so much attention.
But it is not a timer, and it is not perfect. Treasury data show the 10-year yield below the 3-month yield from late October 2022 to mid-December 2024. As of October 2026, the NBER's official chronology still lists April 2020 as the most recent turning point, so no recession has been dated after that inversion.
The economy is not the stock market
- The market looks ahead. Prices reflect expected future profits. Stocks often bottom while the economic news is still terrible, and peak while it still looks good.
- Big companies are not the whole economy. Large index companies earn money abroad and are weighted toward certain sectors, so their profits can grow while parts of the US economy struggle.
- Expectations are priced in. A report that matches the forecast usually moves little, however good or bad it sounds.
- Earnings matter more than headlines. Over years, stock prices follow corporate profits. Economic data matter mostly as clues about those profits and about rates.
The economic calendar
| Release | From | How often | What it tells you |
|---|---|---|---|
| FOMC decision | Federal Reserve | 8 scheduled meetings a year, 2:00 p.m. ET | The rate target and the Fed's view |
| Employment Situation | BLS | Monthly, usually a Friday, 8:30 a.m. ET | Jobs added, unemployment rate, wages |
| CPI | BLS | Monthly, 8:30 a.m. ET | Consumer inflation, headline and core |
| PCE price index | BEA | Monthly | The Fed's preferred inflation gauge |
| GDP | BEA | Quarterly, with revisions | How fast the economy is growing |
| Treasury yields | US Treasury | Daily | The yield curve and long-term rates |
The site's News and economy page collects these, and Today's interest rates shows current rates. Market data sources lists the official sites.
Try it
Pick the next CPI or jobs release. The day before, write down the forecast (many news sites publish a consensus figure) and what you think the S&P 500 will do. On the day, record the actual number, the surprise (actual minus forecast) and how the index moved by the close on the Index dashboard. Do this for five releases. You will learn more about how markets digest data than from any rule of thumb.
Then redo the Gordon model: what is the $4 company worth if the required return falls to 7%? (Answer: $4 / 0.04 = $100, a 25% rise from $80.)
- What inflation rate does the Fed aim for, and which measure does it use? Answer: 2% over the longer run, measured by the PCE price index.
- A company will pay $4 per share next year, growing 3% a year. Using the Gordon growth model, what is it worth at an 8% required return, and at 9%? Answer: $80.00 at 8% ($4 / 0.05) and $66.67 at 9% ($4 / 0.06), a 16.7% drop.
- What does an inverted yield curve mean? Answer: Short-term Treasury yields are above long-term yields. Inversions have often come before US recessions, but the curve is not a timer and not perfect.
- A very strong jobs report comes out and stocks fall. Why can that happen? Answer: A strong report raises the odds of higher rates. Prices move on the surprise compared with the forecast and what it means for the Fed.