Here’s How Interest Rates Affect The Stock Market

When an economy gets “hot” — which is what happens when people have a lot of credit, a lot of extra money, or simply want to spend — businesses end up making things more expensive, either because they don’t have enough to sell, or because they feel they can get away with making more money. When this happens, we end up with inflation, a situation where our money ends up buying us less, per The New York Times. Inflation manifests in the rapid price increases of basic items like food and gas, or even in clothing and household items.

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Inflation is bad because people will need more money to buy less, which, as Forbes notes, is bad for business as a whole. Speaking to the outlet, Touro University professor of business Angelo DeCandia explained that in times of inflation, “Essentials will take precedence over non-essentials as everyone tries to stretch the purchase side of their budget. Think more money spent on groceries and gasoline, and less spent on travel and entertainment.”

Hope College professor of economics Todd Steen, meanwhile, says inflation also translates into less saved, because the money we have on hand isn’t as valuable as it used to be. So to curb inflation, the Fed applies a different set of tools, and they raise interest rates, which should lead to less spending, and lower economic growth.

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