What’s Behind the Federal Reserve’s Rate Hike?

Noting strong job growth, low inflation, and healthy consumer spending, the Federal Reserve raised short term interest rates by a quarter of a percent on Wednesday.

So what does that mean? We explain it.

Okay, so what happened?

The Federal Reserve said it would increase a benchmark interest rate called the federal funds rate to a level between 2.25% and 2.5%. The rate hike is likely to make some consumer borrowing costs go up, for example on auto loans, credit cards, and mortgages.

The Fed is the nation’s central bank, and it’s tasked with overseeing a stable economy.

Fed Chairman Jerome Powell suggested the central bank would continue increasing interest rates in 2019, though at a slower pace than it has in 2018.

Huh? What’s the federal funds rate?

The federal funds rate is a short-term rate that the Fed charges banks to borrow and lend money to one another. The federal funds rate, sometimes referred to as the overnight rate, forms the basis of other interest rates, such as for auto loans, credit cards, and mortgages.

Didn’t the Fed just raise rates?

Yup. The Fed has been slowly increasing the federal funds rate as economic growth has gathered steam. It has raised rates four times in 2018, and nine times since 2015.

The increases follow a seven-year period when the central bank left interest rates at or below 0%, to stimulate the economy following the Great Recession. Officials hoped lower rates would prompt consumer spending and bank lending, among other things.

Back, in 2015, Federal Reserve Chairwoman Janet Yellen made news when she announced the bank would increase the federal funds rate to a range between 0.25% and 0.5%.

What does this mean for the stock market?

News of the interest rate hike sent stock indexes tumbling, because the Fed also suggested the pace of economic growth might cool off in the next year.

But when interest rates go up, it can also make borrowing costs for businesses, not just consumers, increase as well. That can eat away at profits for some companies, and that can also factor into stock market swings.

Nervous about all this volatility? Check out this message about the value of long-term investing (and avoiding the noise) from Stash’s CEO Brandon Krieg.