Fed Rate Increase Effects

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The objective of the Fed's moves is a balance of low inflation (meaning low long term rats) and solid economic growth. 

 

Part One - Less Money to the Banks

The Federal Reserve can raise rates by providing less money into the banking system.  It does this by not buying U.S. Treasury Securities from Banks.  

Lack of payments for the securities decrease the bank reserves. (money in their safe)  

Banks like to keep money around in reserve.  After all, they have people to pay.  So banks then raise short-term interest rates to decrease lending of their reserves.  

 

Part Two - Less borrowing - Less money to the people

People then don't borrow money, because rates are higher.  This can be in the form of short terms loans, car loans, credit card debt, or business debt.

Since people have less money, they spend less.

Or people take money that is in a a risky place like the stock market, and invest it in a nice, safe, bank account since rates are higher.  Or spend it instead of borrowing money.

 

Part Three - Less help from overseas

With rates higher, many foreign companies that have in other countries, move their money here, seeking higher investment yields.  To do this, they have to buy dollars.

This raises the exchange rate, and makes our goods and services that we export more expensive for other countries to buy.

 

Part Four - No Stimulus

 

This means other countries don't buy our goods, our people don't borrow to spend more to buy more goods with their money - which means factories have to make less and hire fewer workers - which shrinks the Gross Domestic Product - slowing the economy!  

And of course, when the economy slows, there is less of inflation, which lowers long term rates.  This is why you will see mortgage rates lower at some point as the Fed continues it's rate increases.