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Detailed explanation-1: -When the Fed raises interest rates, your credit card debt becomes more expensive. That’s because the interest rates charged by credit card companies tend to move in lockstep with the federal funds rate. This key interest rate impacts how much commercial banks charge each other for short-term loans.

Detailed explanation-2: -When inflation is too high, the Federal Reserve typically raises interest rates to slow the economy and bring inflation down. When inflation is too low, the Federal Reserve typically lowers interest rates to stimulate the economy and move inflation higher.

Detailed explanation-3: -“Raising interest rates helps to reduce the overall level of demand and therefore, hopefully, reduces the upward pressure on prices, ” says Gapen. So why might this cause a recession? In the long run, businesses may respond to consumers purchasing fewer goods and services by reducing production, explains Gapen.

Detailed explanation-4: -The central bank tightens policy or makes money tight by raising short-term interest rates through policy changes to the discount rate and federal funds rate. Boosting interest rates increases the cost of borrowing and effectively reduces its attractiveness.