I see economists talk about it all the time, But I don’t understand it..
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There is an interest rate at which banks lend money to each other. This typically happens when a bank has just issued a mortgage or loan; since they paid out money to the borrower, they need to make up the money that they have on hand, so that they can handle daily transactions. The easiest way is to borrow from another bank that has extra money. The interest rate that is charged between the two banks is what the Fed is trying to target by raising/lowering interest rates.
If the Fed makes it more expensive for banks to borrow from each other, then banks are less likely to lend money out to consumers, because they’ll have to pay more interest. Alternatively, they can keep lending, but raise the interest rates on the loans they issue, so they can still make their profit. The net effect is that less money is being loaned, either just because fewer loans are issued or because banks are charging more in interest. That means people are less likely to borrow and less likely to spend, which may help slow down inflation.
It means the federal reserve bank has decided that you should pay more to take out a loan.
This is something the federal reserve typically does when unemployment rates stay below 4% for an extended period of time, and is expected to be that low for years to come.
Supposedly, but not always, this makes the principle price of things such as cars, houses, drop due to higher risk people not getting loans.
Banks borrow money and often that is to then lend to the consumer market.
You’re the consumer market. Anything you borrow has an interest rate where they make money from you paying back your loan debt ect.
The Fed is who lends to Banks and by raising their interest rates charged to banks, they increase the costs of the banks when they lend to you. So you’ll see higher interest rates. This means you’re less likely to borrow or will borrow less (as a consumer group)
In general it makes money more expensive (if you’re borrowing) which is being done to reduce demand in the market, “cooling it” to combat inflation.
The Federal Reserve sets the interest rates that banks can borrow money. The banks use this rate to figure out what interest rate they have to charge people to borrow money from the bank. So if the Fed raises their interest rate, then the bank has to raise theirs as well to make the same amount of money. By doing this, borrowing money (whether it’s mortgages, corporate loans, personal loans, etc) becomes less attractive for everyone, which slows down economic activity. This is done to prevent runaway inflation of the dollar.
The Federal Reserve (the Fed) is the central bank. A central bank has many roles but some key ones are to manage monetary policy, be responsible for issuing new currency and control the supply of money. The latter is the important part here.
Part of doing that is to set a baseline rate of interest.
So like any other bank, the Fed can loan money out to other large institutions like other banks. The interest rate that these banks have on those loans is at that baseline rate I mentioned. Now because these banks who have borrowed from the Fed are also loaning out to other, smaller institutions and regular people (eg for things like home loans), this Fed baseline rate of interest influences the rates that are set by these other banks.
To put it simply, when Fed interest rates are low, it is cheaper to borrow money. The opposite is true.
This is a major tool for controlling inflation. And because inflation right now is high and growing, the Fed has raised the interest rate.
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