Think of the Federal Reserve as the person adjusting a thermostat. When the economy is running hot and prices are rising too quickly, the Fed turns up interest rates to cool things down. It doesn’t lower the price of groceries overnight. We wish it did; that would make the thermostat considerably more popular.
On September 16, the Fed raised its benchmark rate by a quarter of a percentage point, to a range of 3.75% to 4%. Its concern is inflation, which remains above its 2% goal. At the same time, the Fed says the economy is still growing at a solid pace.
So where might you feel the change? Borrowing can become more expensive, especially on credit cards and other loans with variable rates. Savers may benefit from higher yields on cash accounts. If you have a fixed-rate mortgage, your existing payment doesn’t change. And mortgage rates for new buyers don’t move in lockstep with the Fed; they respond to expectations about the broader economy, too.
The bigger point is that higher rates work gradually. A family may postpone a purchase. A business may think twice about financing an expansion. As enough people make those decisions, spending can slow, giving inflation room to ease. The Fed is trying to cool the room without making everyone reach for a winter coat.
What happens next? The Fed’s September projections suggest rates could stay higher for longer than officials expected earlier this year. Those projections are a snapshot, not a promise. Future decisions will depend on what happens with inflation and the economy.
For your own plan, we wouldn’t make a major change based on one Fed meeting. This is a useful moment to review the interest you pay on debt, the yield you earn on cash, and whether your investment mix still fits what you need the money to do.