The Federal Reserve has raised its benchmark rate for the first time since July 2023. The central bank’s Federal Open Market Committee had been holding the federal funds rate steady since the start of the year but decided at its Sept. 16 meeting to increase it by a quarter percentage point, to a target range of 3.75 to 4 percent.
The federal funds rate is the interest rate that financial institutions charge each other when they lend reserves overnight, which affects other interest rates. By raising the cost of borrowing, the Fed aims to slow consumer demand for goods and services, which can drive down prices.
A rate hike is one tool that the Fed can use to fight inflation, which has been “stubbornly above the Federal Reserve’s target of 2 percent,” says Christian Weller, a professor of public policy at the University of Massachusetts Boston. Inflation data released Sept. 11 showed that consumer prices were up 3.4 percent year over year in August.
“At a glance, rate hikes don’t sound great for consumers,” says Ted Rossman, principal consumer finance analyst at Money Management International, a nonprofit credit counseling agency. “Borrowing is already expensive enough.”
But higher interest rates aren’t necessarily bad news all around.
“Like everything, there will be winners and losers,” says Laura Quinby, associate director of labor markets and household finance at the Center for Retirement Research at Boston College. “It really depends on how a household is invested and what sources of income they have in retirement.”
Here’s what to know about how the Fed’s rate hike will affect retirees.
What it means for savers
“One silver lining is that higher rates are going to benefit savers,” Rossman says. That’s because the Fed raising its benchmark rate often prompts financial institutions to offer higher interest rates on deposit accounts.