What does it mean when “Feds raise/interest rates”?

Question

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

In: 0

Answer 1

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.