HUNTSVILLE, Ala. — The sheer mention of the words 'increased' and 'rate' in the same sentence may raise a lot of people's blood pressure, but the decision to increase interest rates is not made on a whim. So what is a Fed rate hike?
This is actually a monetary tool to combat inflation, an issue we face daily.
And speaking of inflation - you can't turn on the TV without hearing about it and you can't leave the house without feeling the effects of it.
"Clearly, this is a problem that the federal reserve has announced that they want - they want to solve it," said Associate Dean with UAH's College of Business, Dr. Wafa Hakim Orman.
One way the Federal Reserve has dealt with inflation in the past is by increasing interest rates nationally. But what are interest rates?
"It's pretty much the price you pay to borrow money, okay. So it's the price of borrowing," said Orman.
This is how the monetary policy plays out, eventually resulting in a leveling out of the inflation taking place.
"What they want to do is to gradually reduce the amount of money in circulation and make it just a little bit harder for people to borrow, to spend. So it's at least a little bit more expensive for people to borrow and the hope is that by doing this, it encourages people to borrow less, spend a little bit less, save a little bit more, and that brings prices down," said Orman.
So - what does this mean for everyday life?
"Expect all of those [mortgage, auto loan, business loan, etc.] rates to go up a little bit. Now, the Federal Reserve announced way back in December that they were going to raise interest rates in 2022. A lot of this has kind of been priced in so mortgage rates have actually been climbing slowly because banks have fully expected this which they should because the Fed said they were going to do it," said Orman.
But this increase in interest rates isn't all bad.
"Well, you should expect to see the interest rate also increase on your savings account, right? So it goes in both directions. On the one side, it becomes more expensive to borrow but on the other side, you can actually earn more by either leaving money in a savings account or investing it in other things like bonds or anything else that gains interest," said Orman.