What impact do Federal Reserve interest rate hikes have on the US economy?

Okay, no problem. Let's talk about this in plain language.

What is the Impact of the Fed Raising Interest Rates on the U.S. Economy? A Plain-English Explanation

You can imagine the Fed raising interest rates as hitting the brakes on the entire economy.

When the economy is running too fast, and prices (i.e., inflation) are rising too sharply, the Fed steps in to hit the brakes, aiming to "cool down" the economy a bit. This "brake" is the interest rate hike.

Conversely, if the economy is too cold and risks recession, they "step on the gas," which means cutting interest rates.

So, what exactly happens after the Fed hits the "interest rate hike" brake?

How Do Interest Rate Hikes Affect Everyday People, Step by Step?

First, it's important to understand that the "interest rate" the Fed raises isn't the rate we get on our savings or loans directly. Instead, it's a "benchmark rate," the cost for banks to borrow money from each other.

When this benchmark rate goes up, it's like the wholesale price of vegetables increasing. The vendors at the farmers' market (major commercial banks) now have higher purchasing costs, so their retail prices for you naturally go up too.

So, the first wave of impact from an interest rate hike is: Money becomes more expensive.

Specific Impacts are Reflected in These Areas:

1. It Becomes Harder to Borrow for Homes and Cars

Mortgage Rates Soar: This is the most direct feeling. For example, if you were eyeing a house with a monthly payment of $5,000, after a few rate hikes, the monthly payment for the same priced house might become $6,000. Many people suddenly can't afford it, or can only buy smaller, cheaper homes. This leads to a cooling down of the entire housing market, and home prices might stop rising or even fall.
Car Loans and Credit Card Interest Rates Get Higher: The cost of buying a car on installment plans increases, and interest on credit card debt also rises. This makes people more hesitant when purchasing big-ticket items, preferring not to borrow if possible.

2. Businesses Are Less Willing to Borrow and Expand

Businesses often need to borrow from banks to open new factories, develop new products, or hire more employees. Now that loan interest rates are higher, businesses' operating costs increase.
Many bosses might think: "Since borrowing is so expensive, let's put new projects on hold for now, and pause hiring too." This leads to a decline in economic activity, and even a potential rise in unemployment.

3. The Stock Market Typically Falls

When Businesses Struggle, Stocks are Affected: As mentioned above, increased business costs and slowed expansion mean less optimistic future profit expectations, which naturally impacts stock prices.
Savings Become More Attractive: After interest rate hikes, the return on putting money in the bank or buying risk-free products like government bonds increases. Some cautious investors might think: "Why should I take risks in the stock market? I might as well take my money out and earn interest by saving it." As funds flow out of the stock market, it naturally tends to fall.

4. The U.S. Dollar Appreciates, Becoming More "Valuable"

Money globally tends to flow towards places with higher interest rates. When the U.S. raises rates, it means converting money to U.S. dollars and depositing it in the U.S. can yield higher returns.
Consequently, international investors will sell off their own currencies and buy U.S. dollars, leading to a surge in demand for the dollar, and thus its appreciation.
For Americans: A stronger dollar means imported goods (like Japanese cars, French wine) become cheaper to buy, which is good.
For U.S. Companies: When their products are sold abroad, they become more expensive when converted to foreign currencies, which weakens export competitiveness and is bad.

In Summary

The Fed's interest rate hike is a "strong medicine," whose core purpose is to increase the cost of borrowing, thereby suppressing consumption and investment demand across society, cooling down an overheated economy, and thus controlling soaring prices (inflation).

But this is like hitting the brakes while driving; it's a delicate skill:

Hit them too lightly, the speed won't decrease, and inflation won't be suppressed.
Hit them too hard, and the car might "stall" directly, leading to an economic recession and mass unemployment.

Therefore, every time the Fed decides whether and how much to raise rates, it's a very difficult decision, as it attempts to walk a tightrope between "controlling inflation" and "maintaining economic growth," searching for that delicate balance.