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Interest Rate Rises 0.5%: Why Is It Good For Apple Stock?

Apple stock shot through the roof after the Federal Reserve historically raised interest rates by 50 basis points. Was the rally counterintuitive?

The big news of the day on May 4 was the Federal Reserve’s announcement that short-term interest rates will rise in the US by 50 basis points. The hike was the steepest in two decades, and it comes on the heels of rampant inflation.

Just ahead of the announcement, Apple stock  (AAPL) - Get Apple Inc. Report was trading higher by as much as 2%. Shares lost steam in mid-afternoon trading, as did the rest of the equities market. But a late-session rally pushed AAPL to $166 apiece and out of correction territory.

At the end of the day, is the 50-basis point increase in the Federal funds rate good or bad news for Apple stock? We explore this question in more detail below.

Figure 1: Interest Rate Rises 0.5%: Why Is It Good For Apple Stock?

Figure 1: Interest Rate Rises 0.5%: Why Is It Good For Apple Stock?

(Read more from the Apple Maven: Warren Buffett Is Loading Up On Apple Stock. Should You?)

Fed is more dovish than expected

It probably helps to understand why stocks reacted so positively to the Federal Reserve’s announcement on monetary policy.

The 50-basis point bump in rates was very much market consensus. This is why the S&P 500 only bounced around a bit when the press release came out, around 2 p.m. EST — but the index neither rallied nor crumbled at first.

The pivotal moment came about 45 minutes later, when chairman Jerome Powell addressed questions following his prepared remarks. In my view, the chief banker sounded quite a bit more dovish than many expected at the start of the day.

First, Mr. Powell suggested that another couple of 50-bp hikes remain on the table, but he did not imply that the more aggressive increases would persist for longer. Also, when asked if a 75-bp bump is a possibility, Jerome assured that the Fed has not been actively considering it.

The Fed chair also mentioned early signs of inflation moderating. For now, Mr. Powell seems confident that rising consumer prices can be combated without substantial intervention from the central bank — something that could, for example, trigger a recession on the horizon.

How rate hikes impact AAPL

There are a couple of ways to look at the impact of interest rates on Apple, its business and AAPL stock: from a fundamentals perspective and from a market sentiment point of view.

Fundamentally, higher rates are bad news for Apple. This is the case because the hike (1) disincentivizes consumers from buying more products and services and, to a lesser extent, (2) cost of borrowing for Apple goes up. The company currently has $120 billion in debt.

The first point above is particularly important if aggressive monetary tightening leads to sharp economic deceleration. Apple could suffer from lower units sold and a decrease in average prices, while the supply chain challenges would not necessarily ease by much.

That said, keep in mind that longer-term interest rates have already been going up aggressively for the past few months — i.e., much of the potential “damage” has already been done. The Fed’s decision on May 4 only formalizes the move higher at the short end of the yield curve.

From a market perspective, the recent increase in the Fed funds rate is probably neutral. This is true because the market had fully anticipated the move higher. If anything, commentary about what the Fed will do next has been mildly to moderately positive news.

The key takeaway

In the end, Apple investors should not get too distracted by the headlines. The Fed’s announcement had likely been priced into AAPL stock well before May 4.

It would not “feel right” to say that the 50-basis point bump is good for Apple. But the Federal Reserve’s optimism towards inflation containment is certainly positive. It is hard to predict the future, but a rally in Apple stock from here would not surprise me much.

Ask Twitter

Short-term interest rates have increased in the US, very much in line with expectations. As it pertains to Apple stock, what is your main takeaway from this month’s “Fed day”?

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