Basics

• In the United States, the Federal Reserve decides monetary policy in part by setting a key interest rate, called the federal funds rate. The federal funds rate is the rate at which banks lend one another money.
  
  

Significance

• Raising the federal funds rate slows economic growth. Interest rates generally are increased to combat inflation, or the effect of rising prices, as well as to cool an overheated economy.
  
  

Effects

• A rise in the federal funds rate directly impacts the prime interest rate, the rate at which banks lend to their most creditworthy customers. When the prime rate rises, consumer loan rates generally also go up and deposit rates, paid by banks on savings accounts, also rise.
  
  

Economic Indicators

• Rising interest rates can help predict economic indicators. For instance, nations that raise rates will, in the short term, strengthen their currency relative to other countries. Likewise, rising interest payments can stress the finances of both debt-laden (or highly leveraged) companies and homeowners with mortgages.
  
  

Considerations

• Interest rate increases do not necessarily have a negative impact on everyone, because rising rates stem rising prices and potentially make income relatively more valuable.