After the financial crisis in 2008, the Fed slashed rates to near-zero levels. Seven years later, the central bank has begun gradually raising interest rates to a more normal level to help the economy recover. The latest rate hike took effect Wednesday. Here’s what you need to know about the move and how it might affect your finances, from mortgages to credit cards.
The Fed’s goal is to slow the growth of consumer prices and other factors that drive inflation. As rates rise, consumers and businesses are less likely to take out loans for things like a new car or home. This can reduce demand, which in turn lowers the pressure on prices and helps to bring down inflation.
A rate hike also impacts saving accounts. When interest rates go up, the amount you earn on your savings will also increase. This is why it’s important to keep an eye on your savings balances when the Fed makes a move.
When the Fed raises rates, borrowers feel the effects more immediately than savers. For example, every 0.25 percentage point increase in the federal funds rate, the benchmark rate that governs borrowing between banks, amounts to an extra $25 a year for each $10,000 in debt you carry. That’s why it’s generally a good idea to pay off high-interest debt first.