1Their life
Maya sees the headline on her phone: "Fed raises rates." Jordan sees it too, and wonders if his credit card just got more expensive.
Neither of them has ever met anyone at the Fed. But that one decision will reach both of their bank accounts.
2How it works
The Fed is the US central bank. The Federal Reserve (the Fed) doesn't take deposits from people like Maya. It's the bank for banks and for the US government, and it sets the country's monetary policy: how easy or hard it is to borrow money.
Congress gave it two jobs. Keep prices stable, and help the economy reach as many jobs as it can sustain. People call this the Fed's "dual mandate." For prices, the Fed aims for 2% inflation a year over time (chapter 5).
Its main tool is one interest rate. The federal funds rate is what banks charge each other to borrow overnight. The Fed doesn't set one exact number. It sets a target range, like 3.75% to 4.00%, and steers the rate into it. That rate is the starting point for the prime rate (chapter 3) and most credit card rates, and it pushes savings and car loan rates the same way.
Who decides, and when. A group called the FOMC (Federal Open Market Committee) votes on the rate, at eight scheduled meetings a year. The decision comes out at 1:00 PM CT (Central Time) on the last day of the meeting, followed by a press conference with the Fed chair.
Raising rates (a "rate hike") cools things down. When borrowing costs more, people and businesses borrow and spend less. Slower spending takes pressure off prices.
Cutting rates (a "rate cut") heats things up. When borrowing is cheaper, people and businesses tend to borrow and spend more, which can help support jobs when the economy is weak.
It's slow, and it's a balancing act. A rate change can take many months, often a year or more, to fully reach the economy. Raise too much and the economy can slow too far and cost people jobs. Raise too little and inflation can stick around. That's why every decision gets so much attention.
3It really happened
11 hikes
In March 2022, prices were rising fast (chapter 1). On Mar 16, the Fed raised its rate from near zero, its first increase since 2018. It kept going: 11 increases in under a year and a half, ending in July 2023 at 5.25% to 5.50%, the highest in about 22 years.
See it in Historical Data →3.0%
Yearly inflation, as measured by the BLS (Bureau of Labor Statistics) Consumer Price Index, had fallen to 3.0%, from 9.1% a year earlier.
See it in Historical Data →3.75–4.00%
The story is still going. After cutting rates in 2024 and 2025, the Fed raised them again, by a quarter of a percentage point to 3.75% to 4.00%, saying the move would support a "timelier return" to its 2% goal.
See it in Historical Data →Hold
At its next meeting, it held rates steady, with two of the 12 voting members dissenting in favor of another increase.
See it in Historical Data →The honest part
Higher rates weren't the only reason inflation fell in 2023: supply chains healed and energy prices came down too. Economists still debate how much credit the Fed deserves. And the Fed's decisions aren't predictions. They're judgment calls, made mostly with the same public data everyone else can see.
← Chapter 5: Prices start risingAll chapters
Sources for this chapter (10)
- Federal Reserve: About the FOMC
- Federal Reserve: Statement on longer-run goals
- St. Louis Fed: The long and variable lags of monetary policy
- Federal Reserve: statement, Mar 16, 2022
- Federal Reserve: statement, Jul 26, 2023
- AP: Fed raises its key rate for 11th time
- BLS: Consumer Price Index, June 2023
- Federal Reserve: statement, Sep 16, 2026
- Federal Reserve: statement, Oct 28, 2026
- Federal Reserve Governor Cook on easing supply and energy (2023)
Maya and Jordan are fictional; every number in "It really happened" is real and sourced. We explain how it works. What you do with it is your call. Commentary and education only. Not financial advice.