(Federal Reserve Board Chair Janet Yellen.Samantha Lee/Business Insider)
Banks give out money all the time — for a fee.
When we borrow and then pay back with interest, it's how banks make money.
The cost of borrowing — interest rates — makes a big difference on which credit card you choose or whether you get one at all.
If your bank wants to make it more expensive to borrow, it's not as simple as just slapping on a new rate, as a grocer would with milk. That's something controlled higher up, by the Federal Reserve, America's central bank.
Why does the Fed care about interest rates?
In 1977, Congress gave the Federal Reserve two main tasks: Keep the prices of things Americans buy stable and create labor-market conditions that provide jobs for all the people who want them.
The Fed has developed a toolkit to achieve these goals of inflation and maximum employment. But interest-rate changes make the most headlines, perhaps because they have a swift effect on how much we pay for credit cards and other short-term loans.
From Washington, the Fed adjusts interest rates to spur all sorts of other changes in the economy. If it wants to encourage consumers to borrow so spending can increase, which should help the economy, it cuts rates and makes borrowing cheap. When people are spending like crazy, it raises rates so that an extra credit card suddenly doesn't seem very desirable.
(Yellen explaining the rate hike in December 2016.Samantha Lee/Business Insider)
Most of the time, the Fed adjusts rates to respond to inflation — the increase in prices that happens when people borrow so much that they have more to spend than what's available to buy.
However, what the Fed is doing right now is a bit unusual.
''This is the first tightening cycle where they've been concerned about inflation being too low," Alan Levenson, the chief economist at T. Rowe Price, told Business Insider.
The Fed's preferred measure of inflation last touched its 2% target in 2012. So the Fed can't exactly argue that it is raising rates to fight inflation, although it expects prices to rise.
So how do rates go up or down?
Banks don't lend only to consumers; they lend to one another as well.
That's because at the end of every day, they need to have a certain amount of capital in their reserves. As we spend money, that balance fluctuates, so a bank may need to borrow overnight to meet the minimum capital requirement.
And just as they charge you for a loan, they charge one another. The Fed tries to influence that charge — called the federal funds rate — and it's what they're targeting when they raise or cut rates. When the fed funds rate rises, banks also hike the rates they charge consumers, so borrowing costs increase across the economy.