Why does the stock market react so much to the Federal Reserve?

Interest rates are the price of money, and the Fed sets the short-term one. That single number ripples into everything: mortgage rates, car loans, what companies pay to borrow, and crucially what a dollar of profit earned in five years is worth today. When rates rise, future profits are discounted more heavily, so stock prices tend to fall. When rates drop, the reverse.

There is a second channel through the economy itself. Higher rates slow borrowing and spending, which slows sales and earnings. Lower rates do the opposite. So a Fed decision is a forecast of the business climate as much as a change in a number.

And a third, which explains the wild swings on Fed days: the market trades on expectations. If everyone expected a quarter-point cut and got it, prices barely move. If they expected a cut and the Fed held steady, or the chair’s press conference sounded more worried than expected, that gap between expectation and reality is what moves prices, sometimes by a lot in an afternoon.

For an ordinary investor the useful part is knowing the meeting dates, which are published a year in advance, so a sudden market move on one of those days does not send you searching for company news that does not exist.