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How Interest Rate Hikes Affect the Stock Market [+ How to Profit]

This guide explains how interest rates impact the stock market, why the Fed is hiking rates, and how traders profit despite rising interest rates. 


Connor Kimball
Head of Operations

On March 14, 2022, the Federal Reserve did something that hadn't been done in two years. For the first time since March 2020, it raised the Federal Funds Rate, what most people call "interest rates," above 0.1%, all the way to 0.33%.


By June 13, the Fed raised interest rates to 1.58%, and then to 4.33% before 2023. The Fed's most recent rate hike in August brought the interest rate to 5.33%, the highest federal funds rate the stock market has seen in 20 years. 

Federal Funds Rate 20Y Chart

federal funds rate chart

This article is an extension of my Q&A with Dutch Masters, where I asked the man behind the trading desk:

  • How do rising interest rate affect stock prices?
  • Why is the Fed hiking interest rates, and will they do it again in 2023?
  • How do stock traders profit while interest rates rise? Examples included.
Table of Contents

    How Interest Rate Hikes Affect the Stock Market

    Key Points

    • Interest rates have an inverse relationship with the stock market. When interest rates rise, share prices fall.
    • How the Fed manages interest rates is the most important macroeconomic signal that swing traders should monitor.
    • Stock traders can still be profitable during rate hikes, high inflation, and recessions.

    Recent Impact of Interest Rate Hikes on the Stock Market

    How has the market reacted to recent hikes in the federal funds rate?


    Dutch Explains The Relationship Between Interest Rate Hikes & the Stock Market

    Why the Fed Hikes Interest Rates (Inflation)

    Key Points

    • Higher interest rates mean lower inflation rates. Hiking interest rates is the fastest way for the Fed to reduce inflation rates.
    • The US inflation rate nearly quadrupled in 2021 and doubled again in 2022.
    • The Fed would rather risk a bad stock market than let inflation rates continue rising.

    If hiking interest rates slows down the economy and causes stock prices to fall, why does the Fed hike rates in the first place? The answer is inflation rates, and the problem is how fast they are rising.


    Raising Interest Rates Reduces Inflation Rates

    Normally, the Fed would wait until the economy is stronger before raising rates. But 2023’s recent rate hikes are motivated by rising inflation rates in 2021 and 2022.

    Year Inflation Rate % Change from Previous Year
    2019 1.81% -25%
    2020 1.23% -32%
    2021 4.70% 282%
    2022 8.00% 70%

    2022 is the first time since the 1960s interest rates exceeded 5% for reasons unrelated to war or oil. 

    Yikes! This chart makes it easy to see why the Federal Reserve wants to get rising inflation rates under control as fast as possible...

    Dutch Explains Inflation & Interest Rates

    How Stock Traders Profit Despite Rising Interest Rates

    Key Points

    • As share prices fall, swimming with the tide of the market is a losing game.
    • Traders stay profitable by betting against the market with inverse ETFs. This is called “shorting the market.”
    • Inverse ETFs are the stocks to buy when interest rates rise as fast as this.

    As swing traders, we aren’t content with fully defensive strategies or sitting on the sidelines for too long. We want to trade and make money this month, no matter how bad interest rate hikes are.

    Inverse ETFs are the best way for active traders to make money while interest rates rise. Inverse ETFs allow you to…

    How powerful are inverse ETFs in a bad market? While the S&P fell 18% in 2022, Carnivore Trading’s portfolio was up 321%! All thanks to our shorts, which are possible with a tool like the inverse ETF.


    Inverse ETFs

    An inverse exchange-traded fund is an exchange-traded fund (ETF), traded on a public stock market, which is designed to perform as the inverse of whatever index or benchmark it is designed to track. These funds work by using short selling, trading derivatives such as futures contracts, and other leveraged investment techniques.

    An inverse ETF has the same practical effect of short selling the stock market. For example, an inverse S&P 500 ETF, will move opposite of the S&P each day. If the S&P 500 rises by 1%, the inverse ETF will fall by 1%, and vice-versa. This makes them a popular investment during bear markets. 

    An inverse ETF has the same practical effect of short selling the stock market. For example, an inverse S&P 500 ETF, will move opposite of the S&P each day. If the S&P 500 rises by 1%, the inverse ETF will fall by 1%, and vice-versa. This makes them a popular investment during bear markets. 

    Inverse ETF Examples (Profiting in a Bear Market)

    2022 was a rough market, no question. Despite that, Carnivore Trading has its most profitable annual performance in history. That was only possible thanks to inverse ETFs. 


    Here are our best inverse ETF sales from last year.

    Dutch Explains How Stock Traders Profit While Interest Rates Rise

    Will the Fed Continue Hiking Rates in 2023?

    Key Points

    • The Fed is unlikely to hike rates again in 2023. Unless inflation rates remain high.
    • The Fed wants an inflation rate around 2%. 2022's inflation rate was 8%.

    So, what’s the Fed going to do with interest rates next? Are more rate hikes coming, or will we settle down for awhile and see what inflation rates do? Dutch and Trader Z discussed this on a recent *APEX call.


    On the call, Dutch questioned Goldman Sachs' prediction that the Fed will lower interest rates this year, citing rising oil and gas prices and food costs. He agrees with Trader Z's thoughts about where the Fed wants inflation rates at.


    Trader Z is not expecting higher rates this year, but that could change if the inflation rate doesn’t drop to 2% or below this year. It is highly unlikely that the Fed lowers interest rates in 2023.


    Trader Z also mused about the general populations' misplaced expectations about inflation. Many young people think that prices will eventually come back down, but this will be an exception, not a rule.


    *APEX is our premium service designed for money managers and retail traders playing with over $100K in their account. For those new to Carnivore, we recommend a 14 day free trial of our Swing Trade Alert Service →

    Watch Dutch Masters Discuss Interest Rate Hikes, Inflation, and How to Profit While Interest Rates Rise

    Watch my full interview with Dutch, where he answered:

    • Why are interest rate hikes so impactful to the stock market?
    • If raising interest rates slows down the economy, why would the Fed keep increasing them?
    • How can stock traders continue to profit while interest rates rise?

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