Your Questions on Interest Rates

Why do we care about the Fed?... Stock market 'juice'... Interest rates and the real economy... What else matters... Housing is starting to turn a corner...

We're going to start at the end today...

Every so often, we get several notes from subscribers on the same subject in response to our daily reports. That tells us that other readers are wondering the same thing... and that we should devote an issue to that topic, not tuck it away in the mailbag section at the end.

In past years, we've done this with things like inflation, government spending, cryptocurrencies, and narrower subjects like farming and the U.S. railroad industry. The conversations have been great and have gone places that I (Corey McLaughlin) never expected.

Today, it's interest rates...

We've been covering daily updates about the Federal Reserve's interest-rate policy and the battles about it in Washington. Several of you have written in asking for more discussion... So here we go...

Here's subscriber Jerry R. with some kind words and a couple questions...

Hi Corey: I enjoy reading your daily Digest and look forward to your Stansberry Investment Hour podcast with Dan [Ferris] every week, but for those of us that are not well versed in macroeconomics I would like for you to clear up some questions that I have.

You stated [yesterday] that Fed Chair Powell has signaled the Fed program of [quantitative tightening] will soon be coming to an end. This policy was done by the Fed selling bonds [or letting them run off the balance sheet] causing long term yields to increase. However, in addition to Powell likely lowering the federal funds rates later this month the Fed might shortly implement [quantitative easing] by buying bonds resulting in long term yields to decrease.

These are typically the result of these Fed policies. What I do not understand is what are the specific intricacies that cause these upward and downward movements in interest rates?

And here's Stansberry Alliance member Darrell W. with a similar question, essentially asking, "Why the heck does the market care so much about what the Fed does?" As Darrell put it...

It does not make sense to me that the entire market seems to hold its breath waiting for the Fed's next move as it pertains to the overnight rate. Do I understand correctly that this is the rate that banks charge one another for overnight lending?

If so, how does that have anything to do with – for example – the loan that the local car dealership has to finance its inventory? The car dealer probably has a locked-in interest rate for at least 6 months. It seems even less connected to the 10-year Treasury which is the "anchor" for home mortgages.

The yield on the 10-year is set by bond traders, not by the Fed. Banks borrow short and lend long, I get that. So if their cost of overnight deposits changes, does it automatically cause them to lower their rates on a 5-year car loan? Maybe it does.

Maybe it's a one-to-one relationship that I simply don't understand... Can you please explain this to me?

First off, thanks for these well-thought-out questions and notes. As always, keep your comments and questions coming to feedback@stansberryresearch.com.

Now, we'll start with a short answer...

Fed policy – real and expected – has the biggest influence on short-term Treasury rates. Longer-term rates (10-year Treasurys and up) are more dictated by market forces.

Let's get into some detail...

To start, let's clarify our terminology. When you hear about Fed "interest rates" or the central bank "cutting or raising rates," this means the federal-funds rate.

As Darrell noted, this is the interest rate at which commercial banks lend their reserve balances to other banks on an overnight basis.

To be even more precise, this "rate" is actually a suggested "target range" that the Fed says banks should lend to each other within.

So, for example, when the Fed cut rates by 25 basis points last month, it was officially lowering the federal-funds rate by a quarter of a percentage point to between 4 percent and 4.25 percent.

And then the banks lend to each other within that range to create the "effective" fed-funds rate, which right now is 4.1%. It was 4.33% the day before the Fed "lowered rates" on September 17 and 4.08% the day after.

As for what that means for everything else...

Your instincts are right on, Darrell. The fed-funds rate does not "automatically" mean everything else with an interest rate attached to it moves in concert. Some might, but they don't have to.

Still, as Stansberry Venture Value editor Bryan Beach recently covered on our Stock Market Trends site, the fed-funds rate is "used to set the baseline for borrowing costs across the economy... from mortgages and credit cards to business loans and Treasury bonds. When the Fed raises or lowers this rate, the ripple effects touch almost every corner of the market."

Lower interest rates are meant to encourage people to spend... And they make it cheaper to borrow to expand businesses. The broad idea is to stimulate the economy.

That's why stock prices, generally, tend to move higher when the Fed signals it's going to "ease" monetary policy by lowering its fed-funds rate range.

Smaller companies can be perceived as having the most to gain from lower rates. Compared with large-cap stocks, they typically rely more on debt. Cheaper access to capital is great news for their finances.

We often refer to this dynamic as market "juice." Frankly, I think the market and especially the headlines tend to overplay the Fed's influence... But the Wall Street adage "don't fight the Fed" has persisted. It's one of Marty Zweig's timeless investing rules for a reason.

In the real economy, though, things can and do move on a different timeline or direction...

When the Fed changes its fed-funds rate, this eventually filters through to things like car loans and credit cards. Many people focus most on changes in the housing market, where interest and mortgage costs tend to trend with the direction of the fed-funds rate.

But even that is not a guarantee.

Starting in the fall of last year, the Fed began lowering rates by a cumulative 100 basis points... and longer-term Treasury yields took off higher. This year, though, the central bank has lowered rates by 25 basis points. It's signaling two more cuts like that by the end of the year. And much like we'd expect, longer-term yields have moved down this time as well.

So, what gives?

The Fed doesn't control most interest rates...

Most of them are determined by a global $20 trillion-plus market of buyers and sellers of U.S. Treasurys.

That includes various institutions, firms, businesses, and investors taking various information, goals, risks, and worldviews into account. That's everyone from my uncle buying me a savings bond when I was born... to the Fed itself buying and selling Treasurys to influence long-term rates.

The Treasury market has an average $1 trillion in daily trading volume. And the U.S. government is regularly issuing new supplies of debt (to pay for government spending) in the form of Treasurys.

And as with any other asset, higher demand means higher prices, and vice versa.

Also, bond prices have an inverse relationship to yields. When you pay more for a bond, it means the fixed interest payments are a lower percentage of your purchase price, and vice versa.

For example, if inflation or growth expectations are on the rise (like we think was happening last fall), the 10-year Treasury yield will likely be rising to compete with higher rates on newly issued debt. That drives down the prices of existing Treasury bonds, since a bond with a lower interest rate is worth less than one with a higher rate.

Our editors and analysts have covered this before...

Here's a piece of a 2014 issue from Dr. David "Doc" Eifrig's Income Intelligence, discussing the Fed's low short-term interest rates following the great financial crisis. As Doc explained at the time, long-term rates ultimately depend on supply and demand...

The Fed is "powerless," and it's all because you – along with billions of other savers – still have your money in the markets. The Fed can't push up interest rates because interest is the "price" of borrowing money. Prices, of course, are determined by supply and demand. It's basic economics.

Despite the Fed's posturing, interest rates on everything but overnight loans between banks reflect the supply of bonds outstanding and the demand, as determined by the amount of dollars ready to buy up bonds.

You can't short circuit the supply-and-demand equation. There's no such thing as "artificially" low interest rates, like some Fed skeptics argue. Bonds will rise and fall based on changing investor perceptions leading to higher or lower demand... not because of a decision from a central bank.

Our Director of Research Matt Weinschenk also touched on this point just a few weeks ago in an edition of This Week on Wall Street...

In the U.S., we're told that the Federal Reserve is cutting interest rates and that they'll continue to fall from here. Lower rates, of course, will make borrowing easier for consumers and the government... and that will shore up the economy.

However, most central banks only control one short-term rate. They can change the overnight rate. But the rate on longer-term borrowings, like 10-year bonds, is set by supply and demand.

Supply is set by governments – more deficit spending means greater supply. And demand comes from global bond investors.

So a lot more goes into where longer-term yields are trading than what the Fed is doing. It matters, but so do big things like U.S. government spending – which requires more issuing of debt. Ultimately, the direction of prices (and yields) plays out in the market over time...

To close things out, here's a real-time example – in housing...

Just this morning, the National Association of Home Builders' ("NAHB") Housing Market Index showed that homebuilder sentiment jumped to a six-month high in October. That's trending in the right direction, but at a reading of 38 this month, the index remains below the 50 level that would indicate more builders are optimistic than pessimistic.

A key issue is affordability.

Just take a look at this chart from the Atlanta Federal Reserve that our colleague David Engle shared on our free Stock Market Trends site this week...

From David...

What you're looking at is the Home Ownership Affordability Monitor ("HOAM"), a measurement put out monthly by the Atlanta Fed that compares median American incomes to the costs associated with homeownership. If those costs rise above 30% of the annual median income, homes are considered unaffordable by this index.

What should jump out is that, at 47% of median income, homeownership is the least affordable it has been in 20 years.

But while the costs of buying a home keep rising, mortgage rates are coming down off a multidecade high. This is just starting to turn sentiment in residential real estate.

Under the hood, all three components of the NAHB's index rose from September to October. And one of them has entered optimistic territory...

Starting to turn a corner...

The index's "expectations" component measures homebuilder sentiment for sales in the next six months. It jumped to 54 in October. That's the first time that homebuilder expectations have entered "optimistic" territory (a reading above 50) since January.

And lower mortgage rates are a huge reason why. As NAHB chief economist Robert Dietz noted, the average 30-year fixed mortgage rate fell from about 6.5% in September to 6.3% in early October.

Looking out wider, mortgage rates are now down nearly 150 basis points from their 2023 high. At 6.3%, mortgages are near their lowest rates in three years.

That's also close to the 6% level that our colleague and True Wealth editor Brett Eversole has said will spark a "thaw" in the housing market and boost sales. Remember, a lot of homebuyers (or refinancers) from the pandemic era have mortgage rates well below current levels.

Approximately 55% of U.S. homeowners have a mortgage loan with a rate below 4% and around 80% have one below 6%. Those are incentives to stay put in a current home. But the lower rates go from here, the more homeowners may be willing to move and take on a new mortgage.

Mortgage rates aren't quite at 6% yet... But they're getting close enough where builders are starting to get optimistic about their prospects heading into 2026.

Homebuilders are the sector to watch with more rate cuts on the way...

With the Fed predicting two more fed-funds-rate cuts this year, mortgage rates could head lower in a hurry. As we wrote last month, that's great news for homebuilder stocks – which have a history of soaring when the Fed is cutting rates.

That activity may already be picking up. In his statement, the NAHB's Dietz said that his group's models indicate a 3% increase in building permits in September. (We won't know the real data until the government shutdown ends.)

But a 3% rise would be the first increase for building permits since March. That pickup in preparations to build could be the first step towards Brett's predicted "thaw" in the housing market... As you likely know, there's a big housing shortage in the U.S.

And there are smart ways to profit from this housing thaw. He recently recommended his favorite to his True Wealth subscribers, and they can find his actionable advice right here.

One more thing before we go...

As we wrote yesterday, our annual Stansberry Research conference begins on Monday at the Encore at Wynn in Las Vegas. We've got a great group of invited guests lined up to speak to subscribers, in addition to your favorite Stansberry Research editors and analysts.

Outside of all the investing ideas we expect to hear, I'm also looking forward to a presentation from comedy writer Alan Zweibel, an original member of Saturday Night Live who also worked on The Late Show with David Letterman and Larry David's Curb Your Enthusiasm.

Some levity in today's world is always welcome...

While in-person tickets to the conference are now sold out, you can still get access to the conference with our Livestream Pass. If you're interested, click here for more information now. Signups for the livestream will end at 11:59 p.m. Eastern time on Sunday.

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Lastly, today here's one more piece of feedback on Fed policy stemming from yesterday's Digest. As always, send your notes to feedback@stansberryresearch.com.

"Everything discussed [yesterday] regarding the Fed and what's left in their toolbox points to QE. QE just means higher cost of living via inflation and more pain for the average American. Inflation is here to stay, and the collapse of the dollar becomes accelerated." – Subscriber Jim V.

All the best,

Corey McLaughlin and Nick Koziol
Baltimore, Maryland
October 16, 2025