Three Steps and Stumble Rule

three steps and stumble rule

The principle that security prices will decline following three consecutive increases by the Federal Reserve in the discount rate it charges commercial banks. The rule stems from the negative effect rising interest rates have on security prices.

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Three Steps and Stumble Rule

A general rule 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.