Episode summary
Why Stocks Really Fall When the Fed Raises Rates
Summary
Dylan Grice argues that stock prices fall when the Fed raises rates because interest rates are the price of money: higher rates reduce how much capital can be spent on business investment, margin purchases, and home buying. He uses a simple example of a company that can spend $1,000 on suppliers at one loan rate but only $975 after rates rise to show how tighter money immediately reduces purchasing power.
He says the market is currently being pulled in two directions: higher rates push valuations down, while a “massive profit boom” keeps supporting equities. That tug-of-war, he argues, helps explain why stocks have not sold off dramatically yet. But if the Fed overshoots and monetary conditions become too restrictive, he expects profits to weaken as the effects ripple through suppliers, businesses, and the broader economy.
Grice also frames inflation as a political and social danger, saying it can fuel anger, bubbles, and even interest in socialism. In his view, the Fed’s job is to bring inflation down without crushing the profit boom or punishing labor and retirees too severely, aiming for a balanced “Goldilocks” outcome rather than an extreme tightening cycle.
Key takeaways
- Grice says higher rates reduce the amount of money businesses, investors, and homebuyers can deploy because interest is the price of money.
- He argues stocks have held up because higher rates are being offset by a massive profit boom.
- He warns that if the Fed overshoots, profits will start to fall as tighter money filters through suppliers and businesses.
- Grice says inflation can drive social backlash and views the Fed’s balancing act as crucial for both financial and political stability.
Notable quotes
“Interest rates are the price of money. Okay? Let's say you're a business”
“So basically, the amount you're able to spend on your business goes down from, let's say, a,000 to 975”
“Right now, it's like a tennis match. You know, on one side is higher rates, the other side is stronger earnings, higher rates, stronger earnings”
“Now over time, if the Fed overshoots and raises too much, makes monetary conditions too restrictive, what will happen over time is that the profits will start to go down”
“inflation is the biggest driver of revolutions that I have seen studying history my entire life”
How the episode opens
Good morning. This is Dylan Jovenet with Behind the Markets. Happy Friday.
Today's Friday, September 18th. This week I had dinner with my daughter and I asked her how her day was and she'd tell me how her day was and then she made the bad mistake of asking me how my day was and I said my day was great and we talked about the markets a little bit and I told her that the Fed had raised rates and the markets have sold off as a result and she made the really big mistake of asking me why. What does that mean?
And you know, I told her and you know, it's interesting because I thought the way I described it to her, she seemed to get it and I figured I'd share with you kind of how that works because one of the questions that we've gotten a lot over the years is folks write in saying, "I understand that there's a seessaw relationship between interest rates and asset prices. When the Fed raises rates, stock prices go down. When the Fed lowers rates, stock prices go up.
I understand there's a seessaw relationship. I have said that a thousand times on this channel over the years, but a lot of folks write in saying, "Why? I don't really understand why.
And that was exactly the conversation I had with my poor daughter this week and I figured I'd share it with you because he seemed to get it and I thought it was valuable. So, why do stocks go down when interest rates go up? Well, first of all, think about it this way.
Interest rates are the price of money. Okay? Let's say you're a business.
For every thousand dollar that you want to borrow, you go to the bank, say, "I want to borrow $1,000 to buy these products from China," let's say.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed rate hikes
- stock valuation mechanics
- interest rates and borrowing
- inflation risk
- market rally vs profit expectations
Watch the episode
Watch “Why Stocks Really Fall When the Fed Raises Rates” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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