Interest Rate Hikes and What They Mean for You

Why Does Fed Change Interest Rates?

The Fed changes rates to maintain a healthy economy. If the economy is slowing down or experiencing negative growth the Fed might decide to lower interest rates, which will make money more available to businesses and consumers. If the Fed thinks the economy is growing too quickly, they will raise interest rates to slow things down and limit inflation.

 

What Happens When the Fed Changes Rates?

When the Federal Reserve (Fed) raises or lowers interest rates a chain reaction is set into motion. When the Fed raises interest rates, banks raise their prime rate, which in turn affects mortgage rates, car loans, business loans and other consumer loans.

Lower rates interest rates usually spur the economy by making corporate and consumer borrowing cheaper. Conversely, higher interest rates are intended to slow economic growth or curb inflation by making borrowing more expensive and less attractive.

When the Fed changes rates, it usually is adjusting the Federal Funds Rate. The Federal Funds Rate is the interest rate that banks charge each other on overnight loans.

What Rate Changes Mean for You

When the Fed raises rates, you can expect:

Higher:

  • Prime Rates
  • Credit Card Rates
  • Mortgage Rates
  • CD Rates
  • Money Market Rates
  • Car Loan Rates

Lower:

  • Borrowing
  • Consumer Spending
  • Home Sales
  • Business Profits
  • Stock Market

 

Conversely, when the Fed lowers rates, you can expect:

Higher:

  • Borrowing
  • Consumer Spending
  • Home Sales
  • Business Profits
  • Stock Market

Lower:

  • Prime Rates
  • Credit Card Rates
  • Mortgage Rates
  • CD Rates
  • Money Market Rates
  • Car Loan Rates
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