When the Federal Reserve decides to raise interest rates, it affects a wide range of products and consumer habits. It may impact your credit card balance, mortgage, savings account or any other borrowing products you use. It also impacts how you invest your money. The Fed sets the cost of borrowing between banks, which is used as the basis for a variety of consumer loans including mortgages, auto loans and credit cards. The prime rate is determined by the Fed and is a key factor in determining your interest rates on these loans. When the Fed raises the prime, your rates increase, and vice versa.
Rate hikes may make it more expensive to borrow for large purchases like cars or homes, but they’re good news for savers. Increasing interest rates incentivize bank deposits and can make your savings earn more, helping you grow your wealth.
The Fed is trying to strike a balance between reducing inflation and stimulating growth. If they increase rates too fast, it will slow consumer spending, which makes up 70% of the economy. However, if they don’t raise them enough, inflation will rise.