What's going on?

After months of build up, the US Federal Reserve (�the Fed�) increased its target interest rate on Wednesday for only the second time since 2006! (tweet this)

What does this mean?

Since the 2008 financial crisis, the Fed has kept interest rates near the extraordinarily low level of 0%. By making it cheaper for people and companies to borrow and spend money, the Fed aimed to generate economic growth. And the economy is indeed doing relatively well: job growth has been strong and inflation has picked up somewhat (note: inflation can be an indicator of economic growth because prices tend to go up when the economy is doing well). But the Fed doesn�t want to keep interest rates low forever: for one, it has to raise interest rates when things are going well so that it can cut them again if/when the economy turns sour.

Why should I care?

For the market: The market appeared to be a little spooked by the Fed�s plans for next year.
Wednesday�s interest rate increase was widely expected, so the announcement alone didn�t really impact the market. But the Fed also said that it expects to increase interest rates more next year than it previously forecast it would. If that happens it would likely be negative for bonds and some stocks, as well as be positive for the value of the US dollar � which is exactly the way the markets traded after the meeting on Wednesday.


The bigger picture: Inflation is one major factor to watch going forward.
The Fed thinks inflation of about 2% is the best rate for the economy (why? click here) and it uses its target interest rate to influence the inflation rate. Higher interest rates make it more expensive to borrow money. In turn, people spend less and prices, in theory, don�t rise as quickly. Inflation is near the Fed�s 2% target, and various indicators suggest it could go even higher next year. Loosely speaking, the higher inflation goes, the more likely it will be that the Fed raises interest rates � so investors will be watching inflation closely.