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What Does It Mean When “The Fed Raises Interest Rates”?

Last week, the U.S. Federal Reserve raised its benchmark interest rate for the third time in 2018.

What is this interest rate?

It’s the interest rate that banks charge to borrow from one another.

When the the federal funds interest rate rises, banks also increase rates that they charge consumers. So in the end, it will cost more to borrow money (think getting a mortgage to buy a house, or buy a car).

Why now?

The Fed changes rates to spur changes in the economy - to cool a strong economy, they often raise rates.

Growth and job gains have been strong in the past decade and the unemployment rate is at the lowest since 2000. Manufacturing data released last week suggests it will continue its course. Inflation (potential increase of cost of goods and services) can also be a worry, however, the inflation rate still remains near the Central Bank’s 2% target.

How will this affect things?

It will be slightly more expensive to borrow money.

If you get a new loan or have a variable rate loan (e.g., mortgage), those will likely increase. Your credit card interest rate might be higher or your variable rate mortgage rate might increase - all leading to potentially higher payments for you.

When banks first raise rates they usually increase rates for their large corporate clients first. Next, credit cards and mortgages rates will be increased by being benchmarked against the prime rate (usually within 60 days), before they trickle down to other types of consumer debt.

The good news?

On the flip side, higher rates often also mean higher interest for those who have savings on deposit at banks. Make sure you have that emergency fund saved up, and take advantage of that savings bump!

Citations and more reading if you are interested!

Investopedia - what is inflation
Business Insider

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