Why does one number move every market?

Among all the interest rates in the world, one is set by committee in a meeting room: the central bank's policy rate. It's the most-watched number in finance. Here's how one number reaches everything you own.

The rate other rates copy

The policy rate is the central bank's chosen level for the shortest-term money in the economy — effectively overnight. Central banks get there two different ways. Some set a rate they themselves pay or charge banks (the ECB's deposit rate, the Bank of England's Bank Rate). Others — the US Federal Reserve among them — announce a target range for a rate that banks charge each other, then steer the market into that range by adjusting what banks earn on money parked at the central bank. So the rate you see quoted may be the target rather than what actually traded: the rate that really printed is called the effective rate, and the gap between the two is itself watched. Either way, banks build every other rate on top of it: deposits, mortgages, business loans. Raise the policy rate and, within months, borrowing costs rise across the whole economy; cut it and they fall. Economists call this chain the transmission mechanism — the plumbing that carries one committee decision into millions of loan contracts.

The gravity effect on markets

Markets feel it even faster than the economy does — through a channel you already half-know from Course 2's expectations lesson:

• Bonds reprice immediately — the seesaw of the next lesson.
• Stocks feel two pulls. Higher rates make borrowing dearer for companies (lower profits) AND make safe alternatives more attractive — why accept stock risk for 7% hoped-for return when a government bond pays 5% guaranteed? Both pulls push valuations down. Cuts reverse both.
• Savers and spenders adjust too: higher rates reward saving, discourage borrowing, cool the economy — which is exactly the point, as the central-bank unit will show.

Rates as gravity

A metaphor worth keeping: interest rates act like gravity on asset prices. Low rates = weak gravity — prices of stocks, houses, almost everything float higher. Rising rates = stronger gravity — everything gets heavier. It's not a perfect law (nothing in markets is), but it explains more of the last two decades than any other single idea.

In the data

The announced number and the traded number are published separately. Here is what the Fed's committee set, a range with a bottom and a top:

And here is the overnight rate that actually traded, the effective federal funds rate, with the volume of loans behind it:

Look at the two dates before the two rates. The announced range is dated every calendar day; the traded rate is computed from real loans, so it exists only for business days and is published a day or more behind. Comparing them honestly means lining up the dates first. Other currencies have their own traded overnight benchmarks — SOFR for secured dollar lending, SONIA for sterling, €STR for the euro — and each sits beside its own central bank's announced rate in the same way.

Try it now

1. Name your economy's central bank and find its current policy rate (the Academy's macro pages track the majors). Note which kind you found: a single rate the central bank pays, or a target range it steers a market rate into.
2. Measure the distance between what was announced and what actually prints, with the two tables above — and notice first that neither side hands you one number to work with. The Fed's table has two rows for its date, the bottom and the top of the range, because the Fed sets a range rather than a rate; average them for the midpoint. The traded rate sits inside that range. Check that no Fed meeting fell between the two dates, then subtract, and multiply by 100 for basis points.
3. Pick your numbers deliberately. Not everything printed in a rates table is a rate: the SOFR Index, published beside SOFR itself, is a running total of compounded SOFR since 2018, and it stood at 1.26 on 28 September 2026. Subtract that from a policy rate and you get a "gap" of hundreds of basis points and no warning whatsoever. A number being printed in a rates table and being the rate you want are separate questions.
4. In calm conditions the answer is a basis point or less: the steering works, and that near-zero is what a functioning transmission looks like. When it stretches, the market has stopped following the committee, which is the first thing a rates desk checks in a bad week.
5. Trace one transmission chain in your own life: policy rate → your bank's mortgage rate → what happens to house demand in your city.
6. One sentence: why do higher rates pull stock prices down through TWO channels at once?