Free Trading School · Level 10: Fundamentals and the News
Central banks and interest rates
Central banks such as the US Federal Reserve, the Bank of Canada and the European Central Bank set short-term interest rates to keep inflation near their target, usually around 2%. Interest rates are the single most powerful force in financial markets.
| If the central bank… | Currency | Stocks (in general) | Bonds |
|---|---|---|---|
| Raises rates or sounds "hawkish" | Tends to strengthen | Often pressured | Prices fall, yields rise |
| Cuts rates or sounds "dovish" | Tends to weaken | Often supported | Prices rise, yields fall |
Markets care as much about the tone of the statement and the press conference as about the decision itself, because they reveal what the bank may do next. A rate hike that was fully expected can still weaken a currency if the bank hints it is the last one.
Follow the rate path, not just today's decision. Markets trade the next move.
Quick answers
Central banks such as the US Federal Reserve, the Bank of Canada and the European Central Bank set short-term interest rates to keep inflation near their target, usually around 2%. Interest rates are the single most powerful force in financial markets.
Follow the rate path, not just today's decision. Markets trade the next move.
Strengthens. Hawkish means higher rates ahead, which tends to attract capital.
Next lesson: The economic reports that matter