What The .75% Fed Rate Hike Actually Means

By now, I’m sure you heard that the Federal Reserve Bank (Fed) raised its benchmark federal funds interest rate by 75 basis points last Wednesday. The question becomes, what does this actually mean? What are the implications? How does this change how we operate our businesses?

What the Fed actually did was raise the interest rate it charges your local bank to borrow whatever money the bank needs to handle its lending and other banking requirements. Banks don’t just lend based on their own deposits.

If they want to expand their lending portfolio and increase their income, they’ll do it through borrowing money from the Fed. By increasing that rate, in turn your local bank will also increase the rates they charge you to borrow to maintain their own margins.

The last time the Fed increased this rate by 75 basis points was 28 years ago in 1994. This big move isn’t completely unprecedented, but it just isn’t done.

If you look at a graph of the interest rate over time, the Fed normally raises it slowly in order to not “shock” the overall economy. They’ll increase it a quarter basis point every month until inflation calms down and the economy is back under control.

But that isn’t what they’re doing now. Last month they increased it by half a point and now a full three quarters in basis.

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