The Federal Reserve Board, which sets the target interest rate that forms the basis for all other interest rates, has raised rates dramatically in 2018. We hear it’s planning more raises for 2019.
A little history: From September 2007 to December 2008 the Federal Reserve rate fell from 5.25% to a range of 0.00% to 0.25%. For the six years between December 2008 and December 2015 the target rate remained at 0.00–0.25%, the lowest rate in the Federal Reserve’s history, in reaction to the financial crisis of 2007–2008 and its aftermath.
So why the increases? In theory, as interest rates rise, the economy and inflation cools. First, since business and the economy have been operating at a very high level, there is less need for a boost from low interest rates. Second, in the minds of the Federal Reserve Board of Governors, inflation is the enemy. The Fed uses a higher rate to slow inflation.
Who wins and who loses? People who invest in cash instruments like CDs and money market funds are very happy with rising rates because their yield goes up on these safe investments. However, rising interest rates cost businesses more on their debt services. And a higher interest rate might mean a buyer gets shot out of a home purchase she could afford just a year ago.