Macroeconomics Guide
Intro & Definition
Welcome to our macroeconomics guide.
Macroeconomics is the study of the economy at a national scale, meaning it doesn’t focus on any single company.
Therefore, when we say “macroeconomics”, we are talking about larger-scale topics – such as inflation, interest rates, national employment numbers, money supply, etc.
Macroeconomic events have major ramifications on public companies today. High inflation could reduce customers: therefore chipping away at revenue. High interest rates could reduce a company’s expenditures: they may borrow less if their bond yields rise.
Furthermore – unlike company-specific (microeconomic) events – macroeconomic events can not only affect the companies your portfolio, but can also affect everything finance-related in your own life. For example, interest rates – which are determined by the US Federal Reserve – can affect savings, house mortgages, loans, etc.
Consequently, understanding macroeconomics is absolutely vital.
Interest Rates
Interest Rates Pt. 1
We discussed Interest Rates Pt. 1 (below) at our meeting on 9/18/2026.
What is an interest rate? Essentially, an interest rate is a percentage (%) fee one must pay when they borrow money.
For example, if George took out a $100K loan (i.e. borrowed $100K) from Citibank for one year, he might be expected to pay $112K back if the loan’s interest rate was 12%.
If interest rates are high, borrowing money is more expensive. If interest rates are low, borrowing is less expensive.
Because so much economic activity relies on borrowing, interest rates affect everything. The federal government borrows money by selling bonds; individuals borrow money by taking out loans; companies borrow money to finance their operations so they can grow. In other words, rate increase (hikes) or decreases (cuts) have widespread economic impacts.
It is important to note that there is no single, universal interest rate. Instead, there exists many types of interest rates, such as the Federal Funds rate, mortgage rates, loan rates, etc. However, these interest rates typically trend similarly in the long run: the reason as to why will be explored later.
Although numerous interest rates exist, the primary benchmark – and the one most commonly referred to – is the Federal Funds rate, set by the US Federal Reserve (the Fed).
The Fed meets regularly on a monthly basis to determine whether rate hikes or cuts are necessary as part of their dual-mandate: price stability and maximum employment.
| Individual seeking to buy a home | Individual with vast savings | Individual with a locked-in mortgage | Individual seeking loans | Individual with credit card debt |
|---|---|---|---|---|
| Marcus is saving to buy a home. He pays 10% up front and finances the other 90% with a mortgage. | Tim holds years of hard-earned savings. He has already paid off his mortgage and keeps his money in a savings account. | Leia bought her house with a fixed mortgage rate of 3% | Ana owns a bakery. She wants to take out a large loan for renovations. | Steve carries thousands in credit card debt. He pays the minimum payment each month, trying to chip away at the debt. |
| The Fed hikes rates and mortgage rates follow, causing Marcus’s mortgage rate to jump from 3% to 5%. | The Fed hikes rates and Tim’s savings account rate rises from 3.5% to 3.9%. | The Fed hikes rates and mortgage rates follow. But Leia has a fixed mortgage, so her rates remain unchanged. | The Fed hikes rates and the interest for a one-year loan jumps by 3%. | The Fed hikes rates and Steve’s credit card debt interest rate jumps from 20% to 30%. |
| HURT: Marcus must now pay more per month to afford the house. | HELPED: Tim’s savings generate more passive income. | NO CHANGE: Leia is not affected since her mortgage rate remains the same. | HURT: Ana must pay more to perform renovations. | HURT: Steve’s payments shift mostly towards paying the interest, making it more difficult to overcome the debt. |
| The Fed cuts rates and mortgage rates follow, causing Marcus’s mortgage rate to fall from 3% to 1%. | The Fed cuts rates and Tim’s savings account rate falls from 3.5% to 2.9%. | The Fed cuts rates and mortgage rates follow. But Leia has a fixed mortgage, so her rates remain unchanged. | The Fed cuts rates and the interest for a one-year loan falls by 3%. | The Fed cuts rates and Steve’s credit card debt interest rate falls from 20% to 16%. |
| HELPED: Marcus now pays less per month to payoff the house. | HURT: Tim’s savings generate less passive income now. | NO CHANGE: Leia is not affected since her mortgage rate remains the same. | HELPED: Ana now pays less to perform renovations. | HELPED: A larger chunk of Steve’s payments is going to paying off principle compared to before. |
In the situations above, we assume no mortgage refinancing takes place.
Notice how these situations effectively flip. Furthermore, these are all changes in the short run. In the long run, rate hikes can reduce inflation, while rate cuts can raise inflation. The effects of interest rate hikes/cuts on inflation will be explored in the next section.
Interest Rates Pt. 2
We discussed Interest Rates Pt. 2 (below) at our meeting on 10/23/2026.
Inflation, the rise in everyday prices and the loss of purchasing power, is directly connected to interest rates: interest rates affect inflation, and inflation affects interest rates.
Let’s look at how interest rates affect inflation first. Because interest rates affect borrowing costs, economic demand or spending is directly swayed by Fed rate hikes/cuts.
In an environment where rates are low, demand is high, and supply is mostly constant, prices naturally begin to creep up until there is an equal quantity demanded and supplied. Conversely, when rates are high, prices fall in response to lower demand.
There are other factors that affect inflation as well, but this section’s focus is on the interest rate side.
[We will explore other factors affecting inflation in later sections]
Now, let’s quickly investigate how inflation affects interest rate decisions.
In an environment where inflation is running high (say 3.9%), the Federal Reserve must take action to ensure price stability. And just like that, we’re brought back to using interest rates to sway inflation.
But now that you’ve made it this far, you must be curious, how exactly does the Federal Reserve control the interest rate? So far, we’ve just assumed they sway their hand and rates magically change. But in reality, it’s a little bit more complex.
To answer this question, we need to clarify that the Fed doesn’t set an exact target number. They don’t say, “interest rates need to be exactly 3.71”. Instead, they set a target range (such as 3.50% - 3.75%).
To create the “floor” (the bottom of their target range) the Fed directly dictates the “interest rate on reserve balances”. This is NOT the same as the Federal Funds rate discussed earlier!