How Interest Rate Decisions Ripple Through Markets

An interest rate decision ripples through markets by changing one overnight rate and, more importantly, what investors expect that rate to be in the months and years ahead. Treasury bills and money-market yields follow almost one for one. Longer-term yields, mortgage rates and stocks react mainly to whatever part of the decision and guidance markets had not already priced in. Bank deposit rates and the wider economy respond more slowly and less completely.

Key takeaways

The Federal Open Market Committee (FOMC) decided on September 16, 2026 to raise the federal funds target range to 3.75%–4.00%, effective September 17. The Fed holds the market rate inside it mainly through interest on reserve balances (3.90%) and the overnight reverse repo rate (3.75%).
Bond yields barely respond to expected rate moves but move sharply on surprises; a surprise 25-basis-point cut has been associated with roughly a 1% rise in broad stock indexes.
Between the first-hike and last-hike days of the 2022–2023 cycle, the target rose 5.00 points (5.25 including the first hike). The 3-month Treasury yield rose 5.07 points, the 2-year 2.87 and the 10-year 1.67. The FDIC's national average savings rate rose just 0.37 point over the whole cycle.
The 30-year mortgage rate tracks the 10-year Treasury yield plus a spread: about 2.95 points in July 2023, against a 1990–2019 average of about 1.66.
Traded assets react within minutes. Fed research puts the peak effect on inflation anywhere from about one year to more than three years after a policy change.

What the FOMC actually sets

The FOMC does not set mortgage rates, bond yields or savings rates, only a target range for the federal funds rate, the rate banks charge each other to borrow reserve balances overnight. In its statement released at 2:00 p.m. EDT on September 16, 2026, approved 12–0, the Committee decided to raise that range by a quarter point to 3-3/4 to 4 percent, noting that inflation "remains elevated." It was the first increase since July 2023, after six cuts from September 2024 to December 2025 had left the range at 3.50%–3.75%. The Fed's history of target range changes dates the increase September 17, the day the new range took effect, not September 16, the day it was decided.

Something has to hold the market rate inside the range. The implementation note issued with the decision sets the administered rates that do this, all effective September 17, 2026:

Administered rate	Setting	What it does
Interest on reserve balances (IORB)	3.90%	Paid to banks on reserves held at the Fed; a bank has little reason to lend overnight for less
Overnight reverse repo (ON RRP) offering rate	3.75%	Offered to eligible ON RRP counterparties, up to $160 billion each per day
Standing overnight repo rate	4.00%	Rate at which the Fed offers overnight repo funding; limits upward pressure on overnight rates
Primary credit (discount) rate	4.00%	Rate for banks in generally sound condition borrowing at the discount window

The Fed's explainer on how monetary policy works gives the logic: a bank is unlikely to lend below what it earns on reserves, and with reserves abundant it can usually borrow at little above that. The Fed calls the IORB rate an important policy tool, says the ON RRP rate plays a similar role for ON RRP counterparties, which cover a wide range of entities, and says standing repo operations help provide a ceiling. The effective federal funds rate in the Fed's H.15 release was 3.88% on October 8, 2026, close to the middle of the range.

Why the surprise matters most

The expected part of a decision is already in prices when the statement comes out. Kenneth Kuttner split each target change into expected and unexpected parts using the change in fed funds futures prices on decision days. The study, published in the Journal of Monetary Economics in 2001, found that bond yields barely reacted to expected changes but reacted strongly to surprises. The working-paper version, covering 42 target changes from June 1989 to February 2000, estimates that a one-percentage-point surprise moved the 3-month bill yield by about 50 basis points on the day, the 5-year by about 48 and the 30-year by about 19. Real surprises are usually far smaller than a full point.

Bernanke and Kuttner applied the same split to stocks in the Journal of Finance (2005). The abstract of the NBER working-paper version reports that "a hypothetical unanticipated 25-basis-point cut" was associated with about a 1% rise in broad stock indexes on average. The largest part of that reaction came through expected excess returns, the extra return investors demand for holding stocks, rather than through expected real interest rates or dividends.

Forward guidance and the dot plot

Because expectations do most of the work, the Fed's words move markets too. In March, June, September and December, each Board member and Reserve Bank president submits a forecast and their view of the appropriate year-end federal funds rate, published as the Summary of Economic Projections (SEP), whose rate chart is known as the dot plot. The dots are individual views, not a Committee decision or commitment.

The 2026 increase shows this. The June 2026 SEP median for the end of 2026 was 3.8%, above the 3.625% midpoint of the range then in place. On July 29, 2026, three voters, Beth Hammack, Neel Kashkari and Lorie Logan, dissented in favor of an immediate quarter-point hike. The 2-year Treasury yield climbed from 3.47% at the end of 2025 to 4.67% on September 15, 2026. On September 16, the decision day, it rose another 7 basis points, and on September 17, when the new range took effect, it gave them back. Most of the repricing came before the meeting, as the surprise research predicts for a well-signaled move. The September 2026 projections put the median for the end of 2026 at 4.1%, and the longer-run median at 3.2%.

Channel by channel, fastest first

The Fed's explainer describes policy working through short-term and longer-term rates, stock prices and household wealth, and the exchange rate. Each channel responds at its own speed.

Money markets and bank deposits

Treasury bill and commercial paper yields "typically move closely with the federal funds rate," the Fed explainer says. Bank deposits are much slower. The FDIC's national deposit rates were 0.37% for savings and 1.73% for 12-month CDs in the September 21, 2026 monthly update, which reflects data from the end of August. The share of a policy change that reaches depositors is the deposit beta:

deposit beta = change in deposit rate ÷ change in policy rate

Savings, Mar 2022 to Aug 2023:      (0.43 − 0.06) ÷ 5.25 ≈ 0.07
12-month CD, Mar 2022 to Aug 2023:  (1.76 − 0.15) ÷ 5.25 ≈ 0.31

The inputs are FRED's FDIC series for savings and 12-month CDs. The March 2022 figure reflects end-February data, before the first hike, so the denominator is the full 5.25-point rise. By contrast, the 3-month Treasury yield rose 5.07 points between the first- and last-hike days, when the target rose 5.00, a beta of about 1. Individual banks, especially online banks, set their own deposit rates.

Illustrative example: with a beta of 0.07, a 25-basis-point hike adds about 0.0175 percentage point to the average savings rate. On a $10,000 balance, that is $10,000 × 0.000175 = about $1.75 more interest a year.

Treasury yields across maturities

Longer-term rates, in the Fed's words, depend on expectations of how policy "will evolve over the duration of the loans," not just on today's rate. A 10-year note also carries inflation expectations and a term premium, the extra yield for tying money up longer. So the short end usually moves most. Because bond prices move opposite to yields, rising yields mean price losses on bonds already held, larger the longer the maturity.

Mortgage rates

The 30-year fixed rate is not tied to the federal funds rate; it tracks longer-term yields plus a spread for lender costs, credit risk and the prepayment option. Freddie Mac's Primary Mortgage Market Survey (PMMS) averages rates on conventional, conforming purchase loans for borrowers with good or excellent credit and 20% down, using applications from Thursday through Wednesday.

mortgage spread = PMMS 30-year rate − average 10-year Treasury yield
                  over the same Thursday-to-Wednesday window

Using FRED's PMMS series and the 10-year constant-maturity yield, the spread averaged about 1.66 points over 1990–2019. It was 2.07 points in the week ending March 16, 2022 and 2.95 points in the week ending July 26, 2023, then narrowed to 2.12 points in the release of October 8, 2026 (7.40% against an average 10-year yield of 5.28%). The widening is why mortgage rates rose about a point more than the 10-year yield during the hiking cycle.

Illustrative example: monthly principal and interest on a $300,000, 30-year fixed loan is about $1,460 at 4.16% and $1,958 at 6.81%, the PMMS rates in those two weeks: roughly $498 a month more.

Corporate credit spreads

Companies borrow at Treasury yields plus a credit spread. Gertler and Karadi found policy surprises produced modest moves in short rates but large moves in credit costs, mainly through term premiums and credit spreads (American Economic Journal: Macroeconomics, 2015). Other forces can outweigh this: the Moody's Baa corporate yield minus the 10-year Treasury yield narrowed over the 2022–2023 hikes (table below) and was 1.48 points on October 8, 2026, below its 1990–2019 average of about 2.35.

Stocks

A higher discount rate lowers the present value of future earnings, and higher borrowing costs and slower demand can reduce those earnings. The Bernanke and Kuttner result adds a third channel: the return investors demand for bearing stock risk. On September 16, 2026, the S&P 500 closed 0.45% lower, a small move for a well-signaled decision.

The dollar

The Fed explainer notes that changes in the relative attractiveness of US assets move exchange rates, and that easing may come with a fall in the dollar. What counts is the gap with other central banks: the European Central Bank, for example, raised its deposit facility rate twice in 2026, to 2.50% with effect from September 16. The Fed's nominal broad dollar index rose about 10.0% from March 16 to September 26, 2022, its high for the cycle, then gave back most of that gain.

Crypto

Evidence is thin. A New York Fed staff report using intraday data, "The Bitcoin–Macro Disconnect" (Benigno and Rosa, 2023), found that in their sample, unlike other US asset classes, Bitcoin showed no systematic reaction to monetary policy and macroeconomic news.

The 2022–2023 cycle in numbers

The table compares closing levels on the decision days of the first hike (March 16, 2022), the last hike (July 26, 2023) and the first cut (September 18, 2024), from the FRED series linked above. Each close includes that day's reaction; each new range took effect the next day. Mortgage rates are the PMMS releases for the application weeks ending on those dates (Freddie Mac changed its survey method in November 2022).

Measure	Mar 16, 2022	Jul 26, 2023	Change	Sep 18, 2024	Change from Mar 16, 2022
Fed funds target range (set at that day's meeting)	0.25–0.50%	5.25–5.50%	+5.00 pts	4.75–5.00%	+4.50 pts
3-month Treasury yield	0.44%	5.51%	+5.07 pts	4.84%	+4.40 pts
2-year Treasury yield	1.95%	4.82%	+2.87 pts	3.61%	+1.66 pts
10-year Treasury yield	2.19%	3.86%	+1.67 pts	3.70%	+1.51 pts
30-year fixed mortgage (PMMS)	4.16%	6.81%	+2.65 pts	6.09%	+1.93 pts
Baa corporate minus 10-year spread	2.23 pts	1.83 pts	−0.40 pts	1.67 pts	−0.56 pts
S&P 500 (price index)	4,357.86	4,566.75	+4.8%	5,618.26	+28.9%
Nominal broad dollar index	116.81	117.76	+0.8%	121.56	+4.1%

The start-to-end changes hide large swings. The S&P 500 closed 17.9% below its March 16, 2022 level on October 12, 2022, and the dollar peaked that September. The 2-year yield (5.19%), the 10-year (4.98%) and the mortgage rate (7.79%) peaked in October 2023, after the last hike, as markets priced rates staying high for longer. The ranking by maturity fits the expectations channel: against the 5.00-point move in the target, the 3-month yield rose about as much, the 2-year a little over half as much, and the 10-year about a third.

The table does not isolate the Fed's effect. Inflation, a strong labor market, earnings, Treasury borrowing and the March 2023 bank failures moved these prices too; narrowing credit spreads and higher stocks despite 5.25 points of hikes show how much other forces can dominate.

Why the economy reacts slowly

Milton Friedman said monetary policy works with long and variable lags, a phrase the St. Louis Fed's review of the idea (Dupor, 2023) traces to his 1960 book A Program for Monetary Stability. Across 18 business cycles, Friedman and Schwartz found that peaks in money growth led business-cycle peaks by about 16 months on average (range 6 to 29) and troughs by about 12. Stock prices and bond yields respond within minutes or hours, the review notes, while inflation and employment take much longer, partly because many prices are agreed months in advance.

Newer estimates differ. In a Kansas City Fed bulletin, Doh and Foerster ask whether lags have shortened (December 2022), measuring the policy stance with a proxy rate that captures forward guidance and balance-sheet policy. Before 2009, inflation's peak response came after more than 12 quarters; since 2009, after about four, with wide confidence bands. Their explanation: markets react to guidance before the rate itself moves.

Frequently asked questions

Does a Fed hike change the rate on my existing mortgage?

Not on a fixed-rate mortgage, whose rate is set at closing. An adjustable-rate mortgage resets on its schedule to an index plus a margin, subject to any caps. The CFPB notes that the initial rate generally lasts only the first few years before periodic adjustments begin.

How is the prime rate related to the federal funds rate?

The H.15 release defines the prime rate as the rate posted by a majority of the top 25 insured US-chartered commercial banks, one of several base rates for short-term business loans. On October 8, 2026 it was 7.00%, 3 percentage points above the top of the federal funds target range.

Can long-term rates rise while the Fed is cutting?

Yes. Between September 18, 2024 and mid-January 2025, the Fed cut the range by a full percentage point in three steps. Meanwhile the 10-year Treasury yield rose from 3.70% to 4.79% (January 13, 2025) and the PMMS 30-year rate from 6.09% to 7.04% (January 16, 2025). Long rates follow the expected path, inflation expectations and term premiums.

Does the discount window rate matter to investors?

Directly, very little. The primary credit rate, 4.00% since September 17, 2026, is what institutions in generally sound condition pay to borrow from the Fed's discount window. Its main role is as a liquidity backstop that helps banks avoid pulling back credit during market stress.

Does the Fed's balance sheet move long-term rates too?

It can. The Fed's explainer says its purchases of roughly $3.7 trillion in longer-term Treasury securities and securities issued by government-sponsored enterprises, made over six years after the 2007–09 crisis, put downward pressure on longer-term rates. The September 2026 directive has a different aim: the Fed rolls over maturing Treasuries, reinvests agency principal into Treasury bills, and buys bills (and, if needed, Treasuries maturing within 3 years) "to maintain an ample level of reserves."

Reading the next decision

The FOMC calendar lists the next meetings for October 27–28 and December 8–9, 2026. Only December brings new projections. A checklist for any decision day:

Before the statement, note how far the 2-year Treasury yield has moved since the last meeting. A large advance move usually means the decision is priced in.
Read the range, then the vote; dissents and their direction show where the next debate is.
Open the implementation note for the new IORB and ON RRP rates and their effective date, usually the next day. Those rates are what move overnight money-market yields.
When projections are released, compare the dot-plot median with the path priced in markets; any gap is new information.
Check deposit and loan rates over the following weeks; savings rates have historically passed on only a small share of each move.
Treat any single day's market move as noise unless it repeats.