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The Fed's interest hike will affect you in ways you may not expect

Here's how interest rates work and what the rate hike means for you.

WASHINGTON — The Federal Reserve raised interest rates a quarter of a point Wednesday

The sheer mention of the words  "increased" and "rate" in the same sentence may scare most people, but the decision to increase interest rates is not made lightly. So what is a Fed rate hike, and what does it mean to you?

Slowing down

Interest rates determine how much interest you're charged on a loan. Changing those interest rates is one of the tools the Federal Reserve has to control inflation or higher prices on products. 

Right now, inflation is at a 40-year high, so the Feds need to bring prices down.

To do that, they need to slow down the entire economy and get people to stop buying things. Once companies stop selling as many things as easily as they have been, they can lower prices to entice people back (which is an oversimplification, but generally what happens). 

So when the Feds set interest rates higher, it costs you more to borrow money to buy things. Because of this, some people won't take out loans. 

Cars, houses and credit cards

Interest rates affect all areas of the economy. 

Car loans are dictated by interest rates. By raising the rate, the car loan becomes more expensive, and fewer people will qualify to buy a car. 

The same goes for credit cards, as the monthly payments for anything you charge to a new credit card will also go up.

When interest rates on home mortgages go up, fewer people qualify for a mortgage. 

Real estate experts say that means Arizona's real estate market will cool off a bit. 

"You’re going to start to see fewer multiple offers," Arizona Association of Realtors incoming president Eric Gibbs said. "The buying power is diminishing right before us."

Gibbs said the luxury or high-end real estate market will probably stay strong, but people buying their first homes will probably be more affected.

But if people aren't going to be buying as many houses, they still have to live somewhere. Gibbs said higher interest rates probably mean rent will go up and rental properties will be more scarce. 

“The ability to get a rental is going to be really tough, even more so now," Gibbs said. 

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"The Federal Reserve is really pushing the publicity on it," ASU economist Lee McPheters said. "They're saying, 'hey, we're on the job.'"

And McPheters said the perception that the Feds are doing something about inflation, can actually help make it true. 

McPheters said a quarter-point hike in the interest rates isn't really that much, but it can help employers believe that employees won't want raises to keep up with inflation. If the employees don't want more money, companies don't have to raise prices, which starts a cycle of inflation. 

"You know, it's not really going to make that big a difference," McPheters said. "But it really affects people's view of what might lie ahead."

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