By Logan Gilland, CFP®
When Hannah and I bought our home, we locked in what was, at the time, the best rate available to us, 6.65%. On a 30 year term with 20% down, our payment runs right around $1,600 a month before property tax and insurance. Had we financed that same house, at the same price, at a 3% rate, the kind we saw only a few years ago, the payment would be closer to $1,050. Same house, same roof, same property. The only thing that changed was the rate, and it added up to roughly $6,600 a year in additional payments.
I am occasionally reminded, usually by someone who financed their first home at 12 percent, that our rate could be worse. They are not wrong. At 12 percent, that same house would run about $2,550 a month (I tend to counter with what their house cost at the time, but the point stands either way).
Rates are fairly intuitive when we are talking about a home or a car. Where it gets more complex, and where I think it matters most right now, is understanding how the Federal Reserve influences certain rates, and how that influence works its way through the broader economy and the markets. I believe this is perhaps the biggest force behind what markets are doing today, so it is worth taking the time to understand it properly.
The Fed and How They Control Interest Rates
The Federal Reserve does not set mortgage rates, or bond yields, or the rates companies pay to borrow. What it directly controls is the federal funds rate, the rate banks charge one another for overnight loans, currently set at 3.50% to 3.75%. Other borrowing rates in the economy move in relation to that number as well as other factors, but longer term rates are based largely on where the market expects rates to go from here.
The Fed operates under a dual mandate: keep inflation near 2%, and support a healthy labor market. When inflation runs hot, the Fed tends to raise rates to slow the economy down which historically has slowed down inflation. When the labor market weakens or there is concern the economy is slowing, the Fed is more inclined to hold steady, or eventually cut, to promote growth.
Right now, I think the Fed is between a rock and a hard place trying to decide where rates should go. In the last Fed meeting a couple of weeks ago, Kevin Warsh insinuated that rates likely needed to increase or at least stay elevated and that the FED was committed to fighting inflation. That day ended with long term bond yields up, and the DOW Jones had its worst day of the year.
Markets have bounced back since that day, but rates have still been in focus. Last Friday’s jobs report showed the economy lost roughly 23,000 jobs in July, against expectations for a gain of about 80,000, with the two prior months revised down by a combined 103,000. Despite that sounding like terrible news, the odds of a rate hike decreased leading to a market rally. Then on Wednesday, inflation came in at 3.4% year over year, in line with expectations and slightly cooler than June’s 3.5%. This reemphasised the point the jobs data made that maybe inflation is not as big of a concern, but unemployment and the economy may need more attention. Again, markets rallied on Wednesday.
How Interest Rates Impact Companies
So how do these changes in short term rates and longer term interest rates impact the companies we invest in? The same math from our mortgage applies to companies, just at a much larger scale.
Right now, the largest asset being financed in corporate America is AI infrastructure. J.P. Morgan estimates hyperscalers, the big companies building the data centers behind artificial intelligence, will spend roughly $697 billion on this buildout in 2026 alone. As these companies spend their billions an increasing share of that spending is being financed with debt rather than cash on hand. The Dallas Fed estimates AI related bond issuance could add as much as $300 billion in new debt by these companies this year alone.
Let’s use that number, if borrowing rates are 1% higher for this new $300 billion in debt. That is a $3 billion in extra annual expense for these companies. Makes my house payment seem a bit trivial. Compound that over years of additional borrowing along with most debts taken out by these companies being ten years or longer, we are talking about serious chunks of change. These changes to the expense line ultimately mean less profitability for companies which is not great for stocks. The same is true on the flip side, lower rates lead to less interest costs, leads to higher profitability, and potentially higher stock prices.
How Interest Rates Can Impact Portfolios
Now we start to see the pieces on the board coming together. Ongoing tensions and stalled peace talks tied to the Strait of Hormuz have kept oil prices elevated, with Brent crude trading near $90 a barrel this month. Higher energy prices feed directly into inflation, and if inflation remains sticky as a result, the Fed could be pushed toward holding rates higher for longer. That keeps borrowing costs elevated for the companies financing this AI buildout, straining margins at a moment when capital spending is already under scrutiny.
The inverse is exactly what we saw play out over the last week and a half. When the data points toward rates holding steady or eventually declining, markets tend to respond favorably, because it eases pressure on the companies most exposed to borrowing costs. A softer labor market lowered the odds of a Fed hike, easing concern over rising borrowing costs, and that relief showed up directly in the stocks most tied to this buildout. Again, technology has been the double-edged sword over the last couple of weeks due to the back and forth of interest rates.
How It All Ties Together
Our mortgage rate was set once, on a single day, and we will have the same payment until we move or refinance or pay off the mortgage entirely. The stock market, however, is constantly updating its assumptions about company profitability based on new interest rate expectations daily. Those expectations are shaped by jobs data, inflation reports, and headlines from the Middle East, and they matter a great deal to the company that needs to borrow for a new warehouse, factory, or data center.
That is also why I would not get too comfortable with this week’s rally. Cooler CPI and a weak jobs report both worked in the market’s favor, but oil sitting near $90 a barrel is one variable that could undo both stories at once. If tensions around the Strait of Hormuz worsen and oil keeps climbing, inflation stops cooperating regardless of what the labor market is doing, and the Fed loses the room it just gained to hold rates steady. Good weeks like these do not mean the pressure is off, but we will take the reprieve.
I believe interest rates, both short term and long term, are the most influential force in this market right now, precisely because they interact with everything else. That is why I spend as much time watching the bond market as I do watching stocks. I expect more volatile weeks ahead, where the headlines swing hard in one direction or another.
None of that changes the disciplined approach we take with clients’ portfolios. We are staying on our guard and looking for opportunities when they present themselves. If you would like to chat about your portfolio, or get a second opinion on an outside portfolio, that is what we are here for.
Best,
Logan
Logan Gilland, CFP®, is Director of Wealth Management at Bluespring Wealth’s Lexington office, where he helps clients turn financial goals into practical plans. He also shares straightforward financial guidance through the DIY Money podcast, Savings & Sense radio show, and his weekly newsletter, Logan’s Lens. Outside the office, Logan and his wife, Hannah, enjoy hosting friends and planning their next national park trip.
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