When the Fed increases the fed funds rate, the intent is to increase borrowing costs across the entire American economy. When Fed interest rate increases make borrowing more expensive, it increases the cost of doing business for publicly traded companies (and privately held companies).
Higher interest rates raise borrowing costs, reducing disposable income, which limits growth of consumer spending. Higher interest rates increase borrowing costs for consumers and businesses, causing consumers to cut back spending on things such as homes, cars, furniture, and appliances. An increase in the interest rate of the benchmark interest rate increases borrowing costs for consumers and businesses, which in theory should lower inflation, causing the overall economy to slow down and eating into demand.
Higher borrowing costs ultimately drag down lending, and therefore economic activity. If economic growth is slowing and unemployment is rising, the Federal Reserve could cut interest rates, making it cheaper to borrow, which should stimulate hiring, investment, and consumer spending. Lower interest rates generally contribute to an expanding economy, as households can borrow more to make purchases, and businesses can borrow more to expand operations. The means eventually have to curb inflation, which is central banks goal with raising interest rates. People who need to borrow are facing higher costs, but those who are locked into a longer-term loan at fixed rates, such as is the case for mortgage loans in many countries, will be well served because the cost of the repayment has been reduced in real terms. People with savings will also be well served by higher rates.
On the downside, though, consumers with assets in savings accounts, money market accounts, CDs, or Treasury securities can benefit from higher rates because the yields on assets in savings accounts are higher. With the Fed selling off some of its bonds and increasing supply on the market, borrowers will need to offer higher rates in order to find buyers. Consumers could still take advantage of expectations for further interest rate increases in coming months by refinancing any high-interest, adjustable-rate debt, which is likely to get even more expensive.
While the Fed recently announced that rates would rise, it takes some time for the increase to be baked in the housing market, so you should refinance any high-interest debt now before rates go any higher. The effect on borrowing costs over the next few months will primarily be determined by how fast -- and still not determined -- The Feds rate increase is. Higher rates on short-term loans to banks would make things more difficult, and banks would probably seek to raise fees further for checking accounts and other services, as well as charging higher rates on short-term borrowing -- credit cards, auto loans, and home improvements.
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