As interest rates rise, borrowing money becomes more expensive. This can make it harder to get mortgages, car loans and credit cards. In addition, it may be harder to pay off debt that was taken out before the increase in interest rates. It’s important to stay informed of changing interest rates, even if you don’t plan on getting any new loans. The reason is that when the federal government increases its rates, the rates at which your financial institution lends money to you will also go up.
The Federal Reserve sets the federal funds rate — the interest that depository institutions charge each other for the use of their federal reserve accounts. The federal funds rate then influences the interest rates of mortgages, loans and savings accounts.
In general, the Federal Reserve raises the Federal Funds Rate when it anticipates that inflation will be too high and that this could cause economic damage by diminishing a dollar’s purchasing power. Inflation is a complicated phenomenon, and the Fed performs a delicate balancing act between slowing the economy and taming inflation.
When the Federal Funds Rate goes up, your savings account interest rates will probably go up a little bit from their pathetically low current levels. This is because banks and other financial institutions must raise their lending rates to cover the extra cost of borrowing. In addition, if you have personal or home equity lines of credit, your loan interest rates will likely go up. The same is true for business loans and many credit card rates, which are usually based on the Fed’s prime rate.