Interest rates and why they move everything
Interest rates are the price of time. Change that price and you change the value of every asset that pays out in the future — which is all of them.
An interest rate is what it costs to have money now instead of later. That single idea propagates into nearly every price in an economy.
There is no such thing as 'the' interest rate
There are many, and they do different jobs. As of August 2026:
- The federal funds rate: 3.50–3.75%. Set by the Federal Reserve. An overnight rate between banks. The Fed controls this one directly.
- The 10-year Treasury yield: 4.695%. Set by the market. What investors demand to lend to the US government for a decade. The Fed influences it; it does not set it.
- The 30-year mortgage rate: 6.67%. Set by the market, priced off long-term yields plus a spread for prepayment, credit and servicing.
The Fed cutting its overnight rate does not mechanically lower a 30-year mortgage rate. Long-term rates respond to expectations about inflation and growth over the life of the loan. In the twelve months to August 2026, the mortgage rate rose from 6.58% to 6.67% while the policy rate sat well below both.
Why rates move asset prices
Any asset is worth the cash it will produce in the future, converted into today's money. That conversion is done by discounting — dividing future cash by a rate that reflects what you could otherwise earn.
$100 received in ten years, discounted at 3%: $100 ÷ 1.0310 = $74.41
The same $100, discounted at 5%: $100 ÷ 1.0510 = $61.39
A two-percentage-point change in the rate reduced the present value by 17.5% — with no change whatsoever to the $100.
This is why rising rates hit fast-growing companies hardest. Their value is concentrated in cash flows far in the future, and distant cash flows are the most sensitive to the discount rate. A utility earning steady money today is affected far less.
The chain of transmission
- The Fed changes the overnight rate.
- Short-term borrowing costs move almost immediately — credit cards, floating-rate loans, business credit lines.
- Expectations about future short-term rates shift, moving longer-term yields.
- Mortgage rates, corporate borrowing costs and the discount rate applied to equities follow.
- Household and business spending decisions change — slowly, over quarters, not days.
- Employment and inflation respond, with a lag typically measured in a year or more.
The lag between step 1 and step 6 means policymakers are always acting on information about the past while the effect of their previous decisions is still arriving. That is the whole reason a committee can look at a contracting labour market and still argue about hiking: they are not setting policy for today's data.
What to watch
- The 10-year Treasury yield, which prices long-term borrowing across the economy.
- The gap between short and long yields. When short-term yields exceed long-term ones, the market is expressing a view about future growth.
- What the Fed says, not only what it does. Expectations move markets before decisions do.