How Does Fed Interest Rate Hikes Affect You?

The Federal Reserve raised its benchmark interest rate a quarter point to a range of 1.25 to 1.5 percent. People often don't understand what impact this rate has to them and how it influences their pocket book. Furthermore, they don't understand how not raising this rate could also impact the cost of goods they buy. The interest rate is the main tool in the chest for government to control the economy.

The government uses the benchmark interest rate to speed up and slow down the economy. People often say, "Why would they want to slow down the economy?" They are not rich and feel the economy should go faster and create even more employment. This doesn't see the big picture.

As the interest rate rises it costs us more money to take loans for houses, education, cars, and credit cards. This means you will spend less and the economy will slow down. Often the savings rate will also rise and people will put more money in the bank than spend it. 

Slowing down the economy is about keeping inflation at bay. When the economy rises too quickly inflation raises the cost of your normal household goods and this leads to you loosing some of your income to the cost of groceries, gas, and other items you buy on a daily basis. Slowing down the economy means keeping those prices within a normal range so you can keep more of your money. 

When the economy isn't doing well and unemployment is high they can increase the economy by lowering the interest rate. Your housing, car, education and credit car loans go down and you are likely to take on more dept. Your purchasing behavior increases the amount of purchases in the economy and it speeds up. 

The problem today is that we are in a global society so these tools only "sort of" work. When we make borrowing cheaper most of us simply buy items from overseas making their economies wealthier and then taking on more debt for many things we probably don't need. We are not reaping the full benefit as a nation.

The Federal Reserve manipulates this rate to keep the economy moving forward at a reasonable rate so that inflation doesn't eat up your paycheck and economic growth continues. While the government has done an "ok" job at this it doesn't strike at the fundamental need to improve manufacturing in the U.S. so that more products are produced here and people buy from us in a way that truly helps both paychecks and lifestyles.