By Sabrina Karl

Last week, the Federal Reserve hiked the federal funds rate. Though expected, the hike made dramatic news for being the largest increase in almost three decades.

Most typically, the Fed changes this rate by a quarter percentage point. But when it needs to make a bigger, faster impact, it can change the rate by a half percentage point or more.

On Wednesday, the Fed hiked rates by a rare 0.75 percentage points. The last time it made such a bold change was in 1994. The reason is because inflation is running white-hot right now, and raising interest rates is a key way to combat that.

While the federal funds rate actually only refers to the rate banks pay each other for overnight loans, its level impacts rates that matter to consumers. Where it’s most pronounced is on rates for credit cards, auto loans, and personal loans. Rates for those products have been rising and will continue to do so.

Fortunately, the rates paid on deposit accounts also rise. That includes savings accounts, money markets, and CDs. So while Fed rate hikes are not good for consumer debt, they help somewhat for savers.

Mortgage rates, on the other hand, are not directly related to the federal funds rate. However, there are ripple effects that do bleed into mortgage rates, and the rising cost of home loans right now is in part, though not wholly, related to the Fed rate hikes.

The Fed’s rate-setting committee meets about every 6-8 weeks, and its next meeting will conclude July 27. When the pandemic began, the Fed dropped its rate to zero to stave off a financial crisis. But this year, it’s begun raising that back up, with three increases this year already, and planned increases through the rest of 2022 and into 2023.