What Moves Stock Prices? Interest Rates, Treasury Yields, Inflation Data and the Fed, Explained

Some days the stock market seems to move on a single number: an inflation report, a jump in bond yields or a few words from the Federal Reserve. If you have ever wondered why a report about grocery prices can knock your 401(k) down by lunchtime, this guide connects the dots.

You do not need an economics degree to follow along. The chain runs from inflation, to the Fed, to interest rates and Treasury yields, to what investors are willing to pay for future company profits. Once you see that chain, the market's daily mood swings make a lot more sense.

What moves stock prices from day to day?

Over the long run, stock prices tend to follow company profits. Day to day, they also move with interest rates, because rates change how much future profits are worth today. That is why inflation reports, Federal Reserve decisions and Treasury yields can move the whole market at once, even when no company news comes out.

Company-specific news, such as quarterly earnings, product launches or lawsuits, moves individual stocks. Interest rates and economic data tend to move almost everything together, which is why you may see broad indexes like the S&P 500 rise or fall on the same morning a big report comes out. Our explainer on the Dow, S&P 500 and Nasdaq covers why those indexes can react differently to the same news.

The Federal Reserve and the federal funds rate

Congress has given the Federal Reserve goals of maximum employment, stable prices and moderate long-term interest rates; the first two are known as the dual mandate. The Fed's policy committee, the Federal Open Market Committee (FOMC), aims for inflation of 2% a year, measured by the personal consumption expenditures (PCE) price index. Federal Reserve: Monetary Policy

The FOMC's main tool is its target for the federal funds rate, the rate banks pay to borrow reserves from each other overnight. The Fed has set that target as a range 25 basis points wide since December 2008. (A basis point is one-hundredth of a percentage point, so 25 basis points equals 0.25 percentage point.) The committee holds eight scheduled meetings a year, roughly every six weeks, and can meet in between if conditions call for it. Federal Reserve: What is the FOMC?

The Fed's own explanation of how this reaches the stock market is unusually direct: "Lower interest rates can make holding equities more attractive, which raises stock prices and adds to wealth." Higher rates work in reverse. Short-term rates on things like Treasury bills and many credit lines follow the federal funds rate closely, while longer-term rates depend heavily on what investors expect the Fed to do in the future.