What's going on?

The suspense is over! For the first time in a decade, the US Federal Reserve raised interest rates. It was a widely expected decision but, nevertheless, US stocks jumped a fair bit: 1.5%. The focus is now on what happens next.

What does this mean?

Low interest rates spur economic growth because it makes it cheap(er) for businesses and people to borrow money and do things like hire workers and buy houses. But low interest rates can also eventually lead to too much borrowing and, consequently, an unsustainable increase in things like house prices. By raising rates, the Fed is mitigating that risk - but doing so only because it thinks the economy is finally strong enough to withstand a bit more of a headwind. Why does the Fed think the economy is strong enough? Unemployment is now at 5%, which is down from 10% in 2009, and the economy is now growing consistently above 2% per year. Also, inflation was low this year, but it is expected to pick up significantly next year - and a little bit of inflation is a sign of a healthy economy. The extent to which employment continues to improve and inflation increases is, roughly, the extent to which interest rates will likely be increased next year.

Why should I care?

For markets: The market got what it expected. Almost everyone thought an interest rate rise was coming and that the Fed would say that it expects future rises to happen �gradually� -- which is exactly what happened. The future path of interest rate increases is now extremely important. Rising rates are generally bad for stock and bond prices, but if it occurs slowly and in conjunction with an improving economy, the market should remain satisfied. For you personally: Banks raised their �prime rate� immediately. That means that �floating-rate� loans � like your mortgage perhaps � will cost more in interest each month. That is exactly how rising rates create a headwind for the economy: it takes money out of your pocket (if you own a home) that you might spend on other things (like a new iPhone).