Fed Rate Hike Impact Lab
Simulate how aggressive Federal Reserve interest rate shocks contract valuation multiples, depress bond principal, stress debt obligations, and boost money market yield.
Asset Stress & Return Impacts
Calculated via Macaulay modified duration, discounted earnings equity compression, and debt servicing delta.
Asset Class Value Trajectory Under Rate Shock
| Segment | Starting Value | Rate Shock Mechanism | Post-Shock Value | Net Change |
|---|
On $20,000 of floating debt (HELOC, variable mortgages, credit lines), this rate hike increases annual debt service by $150.00.
The Mechanics Behind Rate Shock Transmissions
Why Wall Street fears "something more substantial" when Federal Reserve rhetoric turns hawkish:
1. Fixed Income Duration Drag
Bond prices move inversely to yields. When interest rates rise by Δy, bond price declines by approximately -Duration × Δy + ½ × Convexity × (Δy)². A 7-year duration bond loses ~5.25% in market value for every 75 bps increase in benchmark yield.
2. Equity Multiple De-Rating
Higher risk-free rates raise the discount hurdle rate (WACC) applied to future cash flows. High P/E growth stocks suffer highest sensitivity (long equity duration), compressing market multiples from 24x down to 18x–20x even if underlying earnings remain flat.
3. Variable Debt Squeeze & Money Market Tailwind
Credit card APRs, SOFR-pegged business credit lines, and adjustable mortgages adjust upward immediately, dampening disposable income. Concurrently, cash and Treasury bills benefit from higher reinvestment yield, forming a flight-to-safety buffer.