7 Ways the Fed’s Decisions on Interest Rates Affect You

The Fed influences prices

The Fed’s actions have an indirect impact on the prices you pay at the grocery store, gas pump and other retail outlets.

That’s because the cost and availability of money affect people’s willingness to pay for goods and services. When money is cheap and plentiful, there’s more demand and prices tend to rise.

“When the economy’s doing really well and the labor market is good and the unemployment rate is falling, that’s when you have concerns about employers hiring and bidding up wages and inflation rising,” says Gus Faucher, chief economist with The PNC Financial Services Group.

Traditionally, the Fed fights inflation by raising the federal funds rate, which makes money more expensive and scarcer. That is supposed to reduce overall demand and slow the pace of price increases. Raising the federal funds rate is less about fighting inflation and more about getting the rate closer to its long-term neutral of 3 percent to 3.5 percent, says Joel Naroff, president and chief economist for Naroff Economic Advisors.