Fed Hikes Rates Amid Economic Concerns

The U.S. Federal Reserve raised interest rates by a quarter of a percentage point on Wednesday, marking the first rate hike in more than three years.

This move directly impacts short-term rates through the Federal Funds Rate, which sets the cost of overnight borrowing between commercial banks.

The prime rate, or benchmark interest rate used for many consumer products like credit cards and home equity lines of credit, has increased from 6.75% to 7% following the hike by top U.S. lenders including JPMorgan, Bank of America, Citigroup, and Wells Fargo.

Interestingly, as short-term costs rise, longer-term borrowing costs generally come down due to a rising Fed Funds Rate, which can bring economic concerns like growth and inflation under control.

Investors previously felt that these concerns were not being taken seriously enough, causing the 10-year Treasury yield US10Y to spike above the 5.00% level.