It may be the most important tool in the Federal Reserve's toolkit: the interest rate.And on Wednesday, the Fed wielded it for the first time this year, raising rates by a quarter percentage point in a bid to slow down accelerating inflation.But what does it mean when the Fed raises — or lowers — rates? And how does that affect the economy and all of us?Here's how to understand it all.The Fed really has two main jobs.
The first is to ensure that prices remain stable, which generally means inflation that is neither too hot, nor too cold.The second job is to strive for an economy with maximum employment — meaning ensuring the labor market is growing at a healthy pace and people who want jobs can find them.There are times when things are clicking in the economy and both of the two Fed mandates are at peace with each other.Inflation is just at the right temperature, meaning everyday prices are not rising too much, while the labor market is growing steadily, meaning people who want work can find them.But more often than not, the Fed finds itself in a situation where it has to focus on one of the two — or worse: Both inflation and the labor market are flashing warning signs and policy makers have to confront the agonizing choice of which one to focus on first.Loading...The Fed has several tools at its disposal to try to influence the economy — but none is more important than the interest rate.When inflation is running hot, the Fed typically springs into action by raising interest rates — just like it did this week.Although the Fed doesn't directly control what firms charge for mortgages or credit cards, it's hoping that by raising its own interest rate, it can lead to a domino effect across the economy that can then push up many kinds of borrowing costs across the economy.It's the equivalent of applying the brakes on the economy.
The main goal is to try to cool down prices by trying to get people and businesses to think more carefully about their spending.P...