The Federal Reserve raised interest rates by another 25 basis points in February 2023, making it the second rate hike in just three months. This action by the Federal Reserve is part of its effort to normalize monetary policy, which it believes will help support a healthy economy.
The primary reason for the Federal Reserve’s decision to raise interest rates is to help keep inflation in check. Inflation is when the prices of goods and services rise faster than
wages and other incomes. This can lead to an erosion of purchasing power, as people’s incomes fail to keep up with price increases. The Federal Reserve hopes that by raising interest rates, it will slow the rate of inflation and keep prices from becoming too expensive for consumers.
Another reason behind the Federal Reserve’s decision to raise interest rates is to encourage economic growth. When the Federal Reserve raises interest rates, it becomes more expensive for businesses to borrow money, which can slow down their rate of spending. This can have the effect of curbing economic growth, making it difficult for businesses to expand and hire more workers. However, the Federal Reserve believes that by raising interest rates, it can help encourage businesses to invest and grow, which could lead to more jobs and higher wages.