The Fed’s interest rate hike means it costs more to borrow. Here’s how that affects you.
When the Federal Reserve (Fed) raises its central short-term interest rate, or federal funds rate, it aims to tame inflation and cool an overheating economy. That’s a noble goal, but there are often winners and losers.
For instance, a rate increase makes it more expensive for consumers to buy large purchases with credit cards or take out mortgages. It also discourages companies from hiring and investing, which can slow economic growth. Eventually, the rate-hike cycle can even drive the economy into recession.
In the early phases of a rate-hike cycle, the Fed’s action is welcomed by banks, which can earn more money on the dollars they lend to businesses and consumers. It’s also good for consumers who have savings in accounts with fixed interest rates such as checking, money market and CDs. These savings tools have a set rate, called the annual percentage yield or APY, that determines how much the bank pays to attract and keep customers’ deposits.
Then, toward the end of a rate-hike cycle, things begin to change. Inflation begins to slow down, and unemployment, which had been falling, starts to creep upward. The Fed has to decide whether to continue its hawkish policies and risk over-tightening the economy, or shift course to ease off the brakes. That’s when the winners and losers start to switch places. It’s also when the Fed can’t predict what impact its actions will have globally.
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