“Inflation” – the economic term for rising prices – has reached a 40-year high, and might keep rising. The Federal Reserve, the government agency that controls economic policy, is raising interest rates to combat inflation. But what does it all mean for you and your money?
The “Fed” is raising interest rates in the hopes of stabilizing the economy, for the first time since 2018. Here’s how it works and why it’s so important.
Imagine you want to purchase a home or car with a loan from the bank. Due to higher interest rates, it will cost more to borrow – decreasing your likelihood to do so. When fewer people make these purchases, demand lowers, and prices start to fall.
But this doesn’t apply solely to big purchases; it’s also happening at your favorite stores.
Higher interest rates also disrupt business demand. Many businesses expand operations or invest in equipment through loans – and they’re less likely to borrow, too. This means less profit for companies, so they will employ fewer workers and limit salary increases.
All of this together causes prices to eventually start falling back down.
As the Federal Reserve aims to raise interest rates, we can expect lower prices soon. If you’re trying to buy a house or car, this could be bad news – but if you’re struggling, relief could be on its way!