Fed Raises Interest Rates: 5 Things You Need To Know

The Federal Reserve raised the federal funds rate Wednesday, an historic move that experts said signaled an improving economy after the recent recession.

Here’s what you need to know.

What is the federal funds rate?

The federal funds rate controls how much interest banks can charge when they borrow money from each other. That, in turn, affects the interest rates they give out to customers.

Investopedia calls it “one of the most influential interest rates in the U.S. economy.”

How much did it increase?

The normal rate is around 4 percent, according to the Washington Post, to account for inflation. But before Wednesday it sat between 0 and .25 percent.

It was increased Wednesday a quarter of a point to .25 to .5 percent, still a long way to the normal rate.

Why is this historic?

In 2008, the rate was slashed in the middle of one of the worst economic downturns in U.S. history.

The raise, experts say, is a sign that the economy may be on its way back up.

“With the economy performing well and expected to continue to do so, the committee judges that a modest increase in the federal funds rate is appropriate,” Fed Chair Janet Yellen said Wednesday. “The economic recovery has clearly come a long way.”

Was this expected?

Yes, and the reserve expects it to continue to increase as the economy gets better.

“The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen,” the reserve’s announcement said.

When was the last time the interest rate was raised?

It was raised in 2006, just before the start of the recent recession.

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