What it is
A rate hike occurs when a central bank raises its target for the federal funds rate, which is the interest rate banks charge each other for overnight lending of their excess reserves. This action signals a tightening of monetary policy, making it more expensive for banks to borrow money. In turn, banks typically pass on these higher borrowing costs to consumers and businesses through increased interest rates on loans, mortgages, and credit cards. The primary goal of a rate hike is to curb inflation by slowing economic activity, reducing demand, and making borrowing and spending less attractive.
Markets react to rate hikes by often seeing bond yields rise and stock prices fall, as higher borrowing costs can reduce corporate profits and consumer spending, and make future earnings less valuable. For example, a higher federal funds rate typically translates into higher mortgage rates, making housing less affordable and potentially cooling the real estate market. Investors follow FOMC announcements, which explicitly state changes to the federal funds rate target, and adjust their portfolios based on the expected impact on various sectors and asset classes.
Why it matters
Rate hikes make borrowing more expensive, impacting your loan costs and potentially slowing economic growth, but they are designed to fight inflation and protect your purchasing power over time.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice