The most important market

Recently I've found myself reading more and more about US central bank policies. A couple of people asked me why. Out of all available markets, why focus so much on the US? And why central bank policies? It makes sense if you're trading interest rate products, but does it matter for someone focused on US equity options?

It matters more than almost anything else.

I didn't always think this way. On the FX desk, I analyzed G10 economies as peers - the US was the largest, but the framework was the same. Interest rate differentials, growth data, central bank rhetoric. Each economy got similar attention. The 2022 Russia-Ukraine war changed my perspective. I watched USDPLN spike 25% in less than a year. I understood the geopolitical tension, but the move was no longer just about interest rate differentials. It was about capital flows seeking safety. And where does capital flow when the world gets uncertain? The US. This revealed something important: understanding the biggest market helps you understand all other markets. When US rates move, everything else adjusts. When the Fed changes policy, global capital repositions. The US market isn't just the largest - it's the reference point.

But why understand central bank policies when trading equity options?

• Interest rates determine valuations - Every DCF model, every earnings multiple, every risk premium calculation starts with the risk-free rate. When the Fed moves rates, it changes the present value of all future cash flows. This isn't subtle - it's the foundation.
• The Fed controls capital availability - Balance sheet expansion and contraction directly impact how much capital is chasing assets. QE floods the system with liquidity that needs somewhere to go. QT drains it. This drives everything from volatility levels to risk appetite.

You can't trade US equities intelligently without understanding the Fed. The central bank isn't some distant policy maker - it's setting the rules of the game you're playing.

The US market matters because it's the market that moves everything else. The Fed matters because it moves the US market.