How interest rate decisions ripple through every market
A central bank changes one number and every asset class reprices. Here is the transmission mechanism, from bonds to currencies to stocks.
When a central bank changes its policy rate, it adjusts one number, but that number is the price of money, and the price of money is an input to the valuation of nearly every asset. Understanding the transmission turns rate decisions from noise into signal.
Bonds reprice first
The most direct effect is on bonds. A bond pays fixed cash flows, so when prevailing rates rise, existing bonds with lower coupons become less attractive, and their prices fall to lift their yields toward the new rate. When rates fall, existing bonds become more valuable. Short-dated bonds track the policy rate closely, while long-dated bonds respond more to expectations of where rates are heading.
This is why the market cares more about the projected path than the single decision. A rate hike that is fully expected is already in bond prices. The move happens when the decision, or the guidance around it, differs from what was priced.
Currencies follow the yield
Higher rates tend to strengthen a currency, because they raise the return on holding assets denominated in it. Capital flows toward higher yields, bidding up the currency. A central bank that is hiking while others hold steady usually sees its currency appreciate, and one that is cutting into a hiking world sees its currency weaken.
The key is relative rates, not absolute ones. A currency responds to the rate differential against its peers and to how that differential is expected to change. The decision matters less than the surprise relative to what other central banks are doing.
Stocks feel it two ways
Equities respond through two channels that can pull in opposite directions. First, higher rates raise the discount rate applied to future earnings, which lowers the present value of those earnings and pressures valuations, especially for growth companies whose profits sit far in the future. Second, rates move because of the economy, and a hike signaling a strong economy can support earnings even as it pressures multiples.
This is why stocks do not react mechanically to rate moves. The market weighs the valuation drag against the growth signal, and which one dominates depends on the context.
Trading the decision
The amateur trades the headline, the professional trades the surprise. By decision time, the expected outcome is priced across bonds, currencies, and stocks. The move comes from the gap between the decision and expectations, and from the forward guidance. Watch the projected path and the tone, because that is where the repricing actually happens.