After the financial crisis of 2008, the Federal Reserve (the central bank that sets interest rates for banks) lowered them to record low levels. For years, the Fed waited to see if our economy was strong enough to stand on its own before raising them again. Finally, on Dec. 16, the Fed increased the monetary policy rate by a quarter of a point to a range of 0.25% to 0.5%.

When rates rise, it makes borrowing more expensive for consumers and businesses. That reduces spending, limiting the amount of money that circulates in the economy. This is a key goal of the Federal Reserve when it raises rates, and it can help to cool down the economy.

Rising rates can also be a benefit to savers, especially retirees who rely on income from bonds. Bonds are considered safer investments than stocks, so when interest rates rise, the price of bonds go down – giving savers a higher return on their money.

Consumers whose debt payments are based on variable rates like mortgages, car loans and credit cards can expect to see their rates increase with each Fed rate hike. This typically happens within one or two billing cycles and will make it harder for households to manage their debts.

A rate hike can also help to ration capital across the economy, steering it away from unprofitable companies that rely on infusions of free cash and toward growing enterprises that can put it to work more effectively. It can also be beneficial for the stock market, with investors putting their money into stocks that pay higher interest rates than bonds, and into banks whose profits tend to go up as they raise the rates they pay on deposit and loan interest.