When the Federal Reserve raises interest rates, it will have a direct impact on borrowers, savers, and investors. The central bank typically increases its target federal funds rate to combat inflation and slow the economy down when it’s growing too quickly.
In the past, the Fed lowered its rate after financial crises to stimulate economic growth and lower unemployment. But now that the economy is humming along, it’s time to raise the fed funds rate again.
The Fed’s policymaking body, the Federal Open Market Committee, has been debating for months how much to hike interest rates to fight inflation. It recently revised its “dot plot,” which depicts the Fed’s members’ expectations for where the federal funds rate will be at different points in the future. The revised plot now reflects a 30% chance that the federal funds rate will be raised by 25bps or more by September 2023, versus only a 20% chance that the rate will be increased this month.
A higher federal funds rate is good news for savers, who will earn a healthier return on their deposits. But it’s not so great for borrowers, who will pay more in interest on loans. And it’s especially expensive for people buying a home or car, who will see their loan payments go up.
Businesses that are dependent on consumer spending will also feel the effect of a higher interest rate. They’ll likely invest less and hire fewer employees, which could lead to a weaker economy.