Amid surging inflation, the Federal Reserve pushed its key interest rate higher Wednesday by a half percentage point — a significant move that will affect your budget. The Fed’s pumped-up rates take powerful aim at inflation that topped 8.5% in March, while also raising the cost of mortgages and other types of debt.
Inflation is a positive thing, but it can get out of hand quickly. That’s why the Fed has a vested interest in keeping inflation in check by raising or lowering its key rate. But how exactly does the Fed do this? The answer lies in the “interest rate transmission” process.
Consumers, businesses and investors are all affected when the Fed changes its key rate. The federal funds rate, which is the primary tool for controlling inflation, directly influences other key rates — like those on credit cards and home loans. That’s because firms with access to the Fed will lend only if they can earn more than these rates, and consumers will borrow only if they can afford to pay the higher rates.
While rate hikes aren’t good news for borrowers, they can be great for savers. As interest rates rise, financial institutions are likely to offer higher returns on savings tools — such as certificates of deposit (CD) and money market accounts — which means your savings can grow faster. This can also make it more affordable to pay off existing debts like your student or auto loan.
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