How Interest Rate Rises and Cuts Affect Stocks, Gold, Currencies, and Crypto

Interest rates are "the price of money." When rates change, every asset must be repriced, because investors always compare: "If I can get this return from a deposit or a bond with almost no risk, how much should a risky asset return?"

The Basic Mechanism

• Rates rise → borrowing becomes more expensive, businesses invest less, consumers spend less → the economy and inflation slow down
• Rates fall → borrowing becomes cheaper, more money flows into the system → the economy and asset prices tend to get a boost

Effects on Each Asset Type

Stocks

A stock's value is its future earnings discounted back to the present. The higher the interest rate, the lower the present value. Growth stocks, whose earnings lie mostly in the distant future, such as tech stocks, are therefore the most sensitive. Bank stocks, on the other hand, may benefit from a wider interest margin.

Gold

Gold pays no interest. When rates are high, the cost of holding gold (the opportunity cost) rises, so gold prices tend to come under pressure. The variable most closely correlated with gold is the real interest rate (the interest rate minus inflation). Read more: Gold

Currencies

Capital flows to countries that offer higher interest rates. If the Fed raises rates while other central banks stand still, the dollar tends to strengthen, and emerging-market currencies such as the Thai baht tend to weaken.

Crypto

Crypto is a high-risk asset with no cash flow, so it benefits greatly when liquidity floods the system and gets sold off heavily when rates rise.

Bonds

The price of existing bonds falls when rates rise, because new bonds offer higher yields. Read more: Bond Yields

What Matters More Than the Number: Expectations

Markets always trade on expectations in advance. If the market is 100% certain that the Fed will raise rates by 0.25%, asset prices have already adjusted before the meeting date. On the actual announcement day, prices move according to the difference from expectations, for example:

• A larger-than-expected hike, or signals of further hikes → a stronger-than-usual impact
• A hike as expected, but signals of a pause → the market may interpret it as good news