An interest rate hike raises the cost of borrowing for credit card debt, student loans and mortgages. It also affects savings accounts and money market accounts, where higher rates mean your money earns more interest. Fortunately, rising rates won’t affect your credit scores.
The Federal Reserve raises rates to combat inflation, which has been running well above the Fed’s target of 2%. The central bank has a delicate balancing act: if it raises rates too quickly, it can slow the economy and cause a recession. But if the Fed doesn’t raise rates enough, inflation could run out of control.
When the Federal Reserve increases rates, it typically signals the change ahead of time. For example, it may publish a “dot plot” of members’ expectations for when the Fed might raise rates. This helps financial markets know what to expect so they aren’t surprised by sudden changes in policy.
Another way the Fed can signal a coming rate increase is by raising or lowering its target Fed funds rate. The Fed uses this rate to determine how much banks charge each other to borrow. When the Fed lowers this rate, it encourages businesses and consumers to spend more by making it cheaper for them to do so.
However, when the Fed raises its target rate, it makes it more expensive to take out loans and credit cards, reducing demand and hopefully slowing inflation. That’s how the Fed hopes to keep prices under control while encouraging growth and employment.
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