I see economists talk about it all the time, But I don’t understand it..
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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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