The Federal Reserve’s benchmark interest rate touches nearly every corner of the American economy, from mortgage payments to credit card bills to the returns on savings accounts, yet the mechanics of how it works remain unfamiliar to many. At its simplest, the federal funds rate is the price banks charge each other for short-term overnight loans, and it ripples outward from there.

When the Fed raises that rate, borrowing becomes more expensive across the economy as banks pass higher costs on to consumers and businesses, which tends to cool spending and, in theory, inflation. When it cuts rates, borrowing becomes cheaper, encouraging spending but risking higher inflation if the economy is already running hot.

The Fed’s rate decisions are made by its Federal Open Market Committee, which weighs incoming data on inflation, employment and growth at regularly scheduled meetings throughout the year.