The Fed Raised the Interest Rate – What Does This Mean For You?

If you’ve been following the news lately, you may have heard about the Fed raising interest
rates. What does this mean? And most importantly, how might it affect you? On September 16,
2026, the Fed raised interest rates by 0.25%, bringing the new target range to 3.75% to 4%.
When we say things like “the Fed adjusted interest rates,” we’re referring to the Federal Reserve
and the federal funds rate. The federal funds rate is the interest rate banks charge each other to
borrow money. At the end of every business day, commercial banks must hold a specific amount
of cash in reserve to meet federal regulatory requirements and handle customer withdrawals. If a
bank is short on cash, it borrows from a bank with extra cash. The federal funds rate is the
interest rate on this borrowed cash. Changes in this rate then work their way through the
financial system and can affect the rates consumers pay. So, when the Fed raises the federal
funds rate, borrowing generally becomes more expensive.

What was the Fed’s motivation for raising interest rates this time around? To curb inflation.
Inflation, simply put, is the increase in prices over time. A small amount of inflation is a normal
part of a healthy economy, and the Fed aims for inflation of 2% over the long run. However, too
much inflation over a sustained period can eat away at consumers’ purchasing power. Inflation
has remained above the Fed’s 2% goal for several years, which has kept the issue at the center of
monetary policy.

By raising rates, the Fed hopes consumers and businesses will borrow a little less and save a little
more. With less money being spent throughout the economy, businesses may face less pressure,

and in turn have less ability to continually raise prices. Over time, the Fed hopes this can help
bring inflation back toward its 2% goal. It’s a delicate balance. The Fed doesn’t want people to
stop purchasing cars or homes altogether, and it doesn’t want to stop small businesses from
growing. Raising rates too much can slow the economy significantly. But allowing high inflation
to continue also has consequences. The goal is to cool spending enough to reduce inflation
without unnecessarily damaging the broader economy.

To understand the Fed’s strategy, it helps to look back at what happened following the COVID-
19 pandemic. During the economic downturn caused by the pandemic, interest rates were pushed

to nearly 0%. With businesses closing and consumers staying home, the Fed wanted to make
borrowing cheap and encourage people and businesses to spend and invest. As the economy
reopened, the situation changed dramatically. Consumer demand surged while inflation rose
rapidly. Beginning in March 2022, the Fed responded with one of its most aggressive rate-hiking
campaigns in decades. From March 2022 through July 2023, it raised rates 11 times, eventually
bringing the target range to 5.25%–5.50%. Higher rates helped cool demand, and inflation came
down substantially from its 2022 peak. As inflation eased, the Fed eventually began cutting rates
again. Now, with inflation still proving difficult to bring completely back to 2%, the Fed has
once again turned to a rate increase.

The most noticeable effect for many people is that borrowing money can become more
expensive. If you carry a balance on a credit card with a variable interest rate, for example, your
interest costs could rise. New auto loans and personal loans may also become more expensive.
Someone looking to finance a $30,000 car may end up paying more each month or more in total
interest if borrowing rates rise. Mortgages are a little more complicated because the Fed does not
directly set mortgage rates. Mortgage rates are influenced by longer-term market conditions and

expectations about where interest rates and inflation are headed. Still, Fed policy can influence
the broader borrowing environment, meaning prospective homebuyers should pay close attention
to rates when deciding what they can afford.

The news isn’t entirely bad for consumers. Higher interest rates can also reward savers. Banks
and other financial institutions may offer higher yields on products such as high-yield savings
accounts, money market accounts and certificates of deposit (CDs). For someone with money
sitting in a traditional savings account earning very little interest, a higher-rate environment may
be a good reason to compare savings options.

A 0.25% increase may not dramatically change your finances overnight, but it can still be a good
time to take a closer look at your financial situation. If you have variable-rate debt, especially
credit card debt, higher rates make paying down those balances more valuable. If you’re
planning to finance a major purchase, comparing lenders and understanding the total interest cost
becomes increasingly important. And if you have extra cash sitting on the sidelines, higher rates
may create opportunities to earn more interest without taking on additional investment risk.