Three Steps and a Stumble Rule

Three steps and a stumble rule

A rule predicting that stock and bond prices will fall following three increases in the discount rate by the Federal Reserve. This is a result of increased costs of borrowing for companies and the increased attractiveness of money market funds and CDs over stocks and bonds as a result of the higher interest rates.

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Three Steps and a Stumble Rule

A rule of thumb stating that the prices of stocks fall significantly after the Federal Reserve raises interest rates three times in a row. In a booming economy, minor adjustments in key interest rates, both up and down, are fairly normal. However, if the Fed raises interest rates three times in a row, this is taken as an indicator that it intends for interest rates to remain at a comparatively high level for the foreseeable future. This leads investors to sell stock, because the businesses underlying the stock now have the added cost of high interest rates, which reduces profits. The selling of stock causes stock prices to drop.