How Interest Rates Affect the Stock Market

Nolan Vazquez

Co-Presenters: Individual Presentation

College: College of Business and Public Management

Major: BS.FINANCE

Faculty Research Mentor: Yu, Huaibing  

Abstract:

This research investigates the implications of the high interest rate environment observed by the US Federal Reserve for 2022–2025 during which the U.S. stock market is operating. After rates during COVID-19 became historically low, the Fed acted aggressively to lift interest rates to keep inflation in check. These policy changes sparked uncertainty throughout financial markets, and raised questions around the effect of rising borrowing costs on equity valuations and investor behavior. This research study considers the relationship between the federal funds rate-related changes and firm's equity pricing, concentrating on the S&P 500, a major stock market proxy. It also contrasts the sectoral performance, financials, and utilities, to understand if certain industries are more affected by interest rate changes. Based on The Federal Reserve information about monetary policy and stock price history, the study also compares returns before and after major policy rate increases and their market volatility patterns. The primary issue is whether high interest rates have reduced stock market returns.