WEST PALM BEACH, Fla. — The Federal Reserve System, a.k.a. 'the Fed', conducts the nation's monetary policy. They maintain price stability.
When the economy booms, inflation increases and can threaten economic stability. That's when the Fed raises interest rates, which helps cool the economy back down and keep steady growth on track.
On Wednesday, the Fed signaled it plans on raising its benchmark interest rate as soon as March.
But how do higher interest rates affect you?
Higher interest rates can negatively affect the stock market. As the cost of doing business rises, higher costs and less business could mean lower revenues and earnings for public companies, which could affect their stock price over the long run.
Higher interest rates can also have a more immediate effect on the stock market, affecting how investors feel about market conditions.
When a rate hike is announced, some traders might quickly sell off stocks.
When the Fed increases interest rates, the price of existing bonds decline. New bonds will soon hit the market offering investors higher interest rate payments.
Existing bonds will decline in price to become more appealing to investors. Though the interest rate payments will be lower on existing bonds, the lower price of existing bonds balances things out.
A rate hike is good news for anyone with a savings account.
Since the federal funds rate is the benchmark for deposit account annual percentage yields, this means you earn more interest from savings accounts, checking accounts, certificate of deposits and money market accounts.
Most credit cards charge a variable interest rate. Variable rate loans charge interest rates based on benchmarks that reference the federal funds rate. They're great when interest rates are low, but become less appealing when rates increase.
Existing fixed-rate loans aren't affected by a rate increase, though new fixed-rate loans can see higher interest rates.
Auto loan rates are determined by the time of year, type of vehicle and primarily by the borrower's credit score.
However, the Fed sets the benchmark rate by which auto loan lenders set their rates. When the Fed raises interest rates, auto loan rates may also rise.