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Individual Stocks

Interest Rates

What happens when the Federal Reserve changes the interest rate it charges to member institutions?

When the Federal Reserve changes the interest rate it charges to member institutions, banks must immediately spend more to acquire capital, and therefore must increase the rate they charge individuals and corporate entities to use their funds. Because of this movement, individuals must pay more for their variable interest rate loans, mortgages, and perhaps even their credit cards, which may redirect money used to buy goods and services, and directs more of this money to pay for finance and interest charges. If people buy fewer goods and services as a result, a corporation’s sales revenues and profits may begin to suffer. Corporations also feel the effects of these interest rate changes because they must now pay more to borrow money to finance short-term dips in their available cash, as well as money used to develop products, fix factories, and begin new ventures, among many other corporate uses of credit. These factors may affect a company’s profitability, which ultimately may affect the stock’s price.



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