federal reserve

8 things you should know before the Fed hikes interest rates

What the Fed actually controls
What the Fed actually controls | Brent Winebrenner/Getty Images

What the Fed actually controls

The Federal Reserve can't actually "set" interest rates for financial products.

When the Fed "raises interest rates," what it's actually doing is boosting the target of one specific rate -- the federal funds rate. This is the rate that banks charge one another for overnight loans.

Because the federal funds rate is basically the "cost" of money for banks, as the federal funds rate rises so does the "price" of all bank loan products.

For example, the prime rate tends to be set at 3 percentage points above the federal funds rate. The prime rate is then used as a benchmark for many short-term financial products, including credit cards and home equity lines of credit.

Keep track of leading rates such as the federal funds rate and prime rate.

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