The Federal Reserve Explained
Rates are the price of money — they quietly shape almost everything.
The Federal Reserve influences the cost of capital via policy rates and liquidity conditions. Investors do not need to predict every meeting, but they do need a simple mental model: rates affect discounting, credit, and risk appetite.
A Minimal Fed Model
What changes when rates rise
- Borrowing becomes more expensive; credit tightens.
- Valuations compress, especially for long-duration assets.
- Risk appetite often falls; volatility can rise.
Two Misconceptions
Practice: Rate Moves vs. Market Reaction
Key Takeaways
Rates affect discounting, credit, and risk appetite — that is why markets care.
Focus on the policy regime and reaction function, not single headlines.
Scenario thinking beats trying to predict every meeting.
The Federal Reserve Explained
Rates are the price of money — they quietly shape almost everything.
The Federal Reserve influences the cost of capital via policy rates and liquidity conditions. Investors do not need to predict every meeting, but they do need a simple mental model: rates affect discounting, credit, and risk appetite.
Table of Contents
A Minimal Fed Model
What changes when rates rise
- Borrowing becomes more expensive; credit tightens.
- Valuations compress, especially for long-duration assets.
- Risk appetite often falls; volatility can rise.
Two Misconceptions
Practice: Rate Moves vs. Market Reaction
Key Takeaways
Rates affect discounting, credit, and risk appetite — that is why markets care.
Focus on the policy regime and reaction function, not single headlines.
Scenario thinking beats trying to predict every meeting.
Related Terms
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