As the central bank raises its key rate, it trickles down throughout the financial system
The Fed raised its key short-term interest rate from 1.0 to 1.25 percent today, a move widely expected given strong employment figures and rising inflation.
While the rate, known as the federal funds rate or overnight rate, applies to banks borrowing money from other banks, it drives up the cost of borrowing throughout the financial system.
The rate hike is good news in terms of what it says about the economy—it speaks to more jobs and higher wages. But for average Americans looking at car loans or a variable credit card interest rates, they may prefer it stayed where it was.
When the fed raises this overnight rate at which banks borrow from each other to maintain their reserve requirements, banks tend to immediately raise the prime rate they charge their very best customers, and it carries on from there.
