When the Federal Reserve raises interest rates, the news often treats it like a Wall

Street matter, not affecting main street. But we must see it differently. Those decisions hit Main Street harder than most admit. But before we can arrive at such a conclusion we must answer two basic questions: what are interest rates and why do they matter?

What Are Interest Rates?

Interest rates, simply put, are the cost of borrowing money. The Federal Reserve (Fed), the United States’s central bank, sets a key interest rate called the federal funds rate: the rate banks charge each other for overnight loans. But why does the Fed levy them?

The “Why” Behind It

The Fed doesn’t raise interest rates at random. The “why” comes down to balance. The Fed has a congressional dual mandate which details their main two goals, being maximum employment and stable prices, their current long term inflation target rate is 2%. This means the Fed raises rates when inflation is significantly stronger than 2% in hopes of cooling spending so prices don’t go out of hand. This principle has guided the Fed’s interest rate decisions over the past two years. 

On the other hand, if the economy slows down and jobs are at risk, the Fed cuts rates to encourage businesses and consumers to borrow, spend, and hire.  But why should the average consumer care when it’s the Fed’s job to levy them?

Why Do Interest Rates Matter?

Interest rates aren’t just numbers in financial news, they decide what everyday life

costs. If someone from Stevenson takes out a loan for college, the higher rate at which they are forced to take out that loan means they will have to owe much more than the money loaned in the future. What about buying a first car after graduation? Higher rates also make the monthly payment for car loans harder to manage. 

In fact, the default rates for all commercial loans has spiked up since 2021 from 1.5% to 2.75%, according to the St. Louis federal reserve, coinciding directly with the rise in fed funds rate. The cracks in the economy are starting to show signs of the pressure high interest rates put on consumers.

In essence, higher rates stretch teenage budgets at the exact time they’re trying to get started. 

How Markets React

People often underestimate the ripple effects. When rates climb, stocks usually sink because companies can’t borrow cheaply to expand. Bond yields rise because new bonds must pay more interest to compete, while older bonds lose value since they offer lower returns. Even the dollar’s strength flips with the Fed’s decisions. A strong dollar might sound good, but it undercuts American businesses by making exports pricier overseas.

All these factors coupled together can drastically change the price of goods domestically, complicate matters for the federal reserve, and put the cost of borrowing for the American dream out of reach.

In the end, headlines about the Fed aren’t optional reading. They are signals of how expensive life will get and how many doors will open or close for young people entering the job market. The next time you see the Fed raising rates, don’t shrug it off. That decision could decide whether someone can afford a car, how fast you pay off loans, or what kind of job market you graduate into. Ignoring central bank decisions is like ignoring the weather forecast before a storm. We might not control the storm, but we have no excuse not to prepare for it.