How the Fed Moves Markets (and When It Doesn't)

The textbook channel

Lower rates → cheaper credit → more spending and investment → higher corporate earnings → higher equity valuations. Lower rates also reduce the discount rate applied to future cash flows, lifting multiples directly.

The real-world wrinkle

Markets don't price the level of rates; they price the change. The first cut of a cycle is often met with equity selling because it confirms deteriorating growth.

When it breaks

In a liquidity crisis (2008, March 2020) the rate channel is overwhelmed by credit risk. In a supply-shock inflation (2022) rate hikes compress multiples without cooling the inflation they're meant to fight. Knowing the regime matters more than knowing the rate.