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On Wednesday, the Federal Reserve decided to raise interest rates to 1%. How will that affect us and frankly, what does “Raising Interest Rates” really mean?
When the Federal Reserve says it will raise interest rates, what it is indicating is that it will increase the Federal Funds Rate (Overnight Rate) which is the interest rate that banks pay the Federal Reserve for borrowing money. Banks will therefore reduce the amount of money they borrow from the Federal Reserve because they want to keep their costs down.

This has the effect of lowering the supply of money in circulation. If this applies to banks, how does this impact us? The Prime Interest Rate, which is the interest that banks charge their best customers, is based on the Federal Funds Rate. Mortgage loans, auto loans, credit cards, and other consumer loans are in turn, based on the Prime Interest Rate. On the plus side, banks will pay us a higher interest to keep our money in their banks in order to increase the bank’s supply of money available.
Rising interest rates therefore brings with it a mixture of good news and bad news. Here is a New York Times article written this past Tuesday, March 14th by Nelson Schwartz that I would like to share with you. He breaks down what this Interest Rate hike will mean for all of us.