The Federal Reserve (the Fed) is the central bank of the United States and the single most powerful institution in financial markets. Its primary tool is the federal funds rate — the interest rate at which banks lend to each other overnight. When the Fed raises this rate, borrowing becomes more expensive throughout the economy. When they lower it, borrowing becomes cheaper. This one lever affects everything: mortgage rates, car loans, credit cards, corporate borrowing, and most importantly for investors — stock valuations.

The Fed has a dual mandate: maximum employment and stable prices (2% inflation target). When inflation is too high, they raise rates to cool the economy. When unemployment is too high, they lower rates to stimulate growth. The balancing act between these two goals is the central drama of monetary policy. The eight scheduled FOMC (Federal Open Market Committee) meetings per year are the most important dates on any trader's calendar. The statement released at 2:00 PM ET and the press conference at 2:30 PM can move markets by 1-2% in minutes.

Interest rates affect stock prices through the discount rate mechanism. When you value a company, you estimate its future profits and discount them back to today's dollars. Higher interest rates = higher discount rate = future profits are worth LESS today. This is why growth stocks (like tech companies with earnings far in the future) get hit hardest when rates rise. Value stocks (like banks and energy companies with earnings right now) are more resilient. This rotation between growth and value based on rate expectations is one of the most important dynamics in markets.

The bond market is the Fed's scorecard. The 2-year Treasury yield reflects what the market expects the Fed to do with short-term rates. The 10-year yield reflects longer-term growth and inflation expectations. The CME FedWatch tool shows the probability of rate changes at each upcoming meeting — it's derived from fed funds futures contracts and is the best real-time indicator of what the market expects. Learning to read FedWatch probabilities will make you a better trader than 90% of retail investors.