[Afral Salam]

Okay, so I’ve been getting deeper into trading online, mostly watching the markets around economic releases like interest rate decisions, inflation reports, that kind of stuff and I keep hearing analysts and traders say things like ‘the Fed raised rates by 25 basis points’ or ‘we’re pricing in a full percentage point increase.’

I’m trying to understand what that really means in terms of how it affects the market. Like, when they say ‘percentage point,’ is that just a fancy way of saying something went up by a certain percent, or is it something different altogether?

How do percentage points factor into price moves or sentiment when I’m looking to trade a reaction? Because I don’t want to misunderstand what they’re actually saying and jump into a trade thinking it’s a 1% change, when maybe it’s actually something much bigger.

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[Terrence Powers]

a basis point is simply 1/100th of 1%, so 25 basis points would be 1/4 of 1%. if you’re referring specifically to the fed funds rate, which it sounds like you are, wall street typically prefers a lower interest rate environment as it tends to lower the cost of capital and credit, thus encouraging businesses to invest in profit-inducing capital expenditures and consumers to more aggressively run up their credit card debt. if left unchecked however, all that cheap money increases demand relative to supply and might lead to inflation raising above the fed’s target rate of 2% which will ultimately lead the fed to again to raise rates, thus theoretically slowing growth, profits and again, theoretically, returns on your stock investments. the bond markets, however, take a very different view of things, and will collectively take action to ensure that rates don’t fall so low as to cause excessive inflation which, as we’ve seen recently in the bond market’s reaction to what it views as an inflationary tariff agenda, it is loath to condone. (see; Bond Vigilantes). ultimately, all this stuff rolls back into the financing of our national debt, the value of the dollar, trade deficits, the housing market; all kinds of ancillary and not particularly predictable concerns. at the end of the day, however, and at least in the short term and all else being equal, a relatively lower fed rate is considered to benefit stock investment returns. i’m a relatively new initiate to all these considerations myself, so you’ll want to do some deeper digging for a more complete understanding (it’s a bit of a rabbit hole). if you intend to trade crypto or forex, you definitely don’t want to be in the dark about the current interest rate regimes of the participating players. for stocks as well i would think but, for day-trading at least, one might get away with a little more ignorance as so much of the strategy involved seems to be somewhat divorced from the macro-economic backdrop and more dependent on statistical probabilities. bet the trend my friend.

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[Afral Salam]

Thanks for the detailed breakdown, really appreciate you taking the time. The way you connected rates to broader market behavior helped put a few things into perspective.

By Bond Vigilantes, do you mean the blogging site?

I’ve mostly been tracking price action around scheduled releases, like FOMC or CPI, but I’m starting to realize it’s not about the number itself, it’s just how the market interprets the number vs expectations!

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