Understanding the Fed's Interest Rate Hike: A Biz Kid Guide

It was a headline months if not years in the making: today, the Federal Reserve announced it will raise interest rates in response to rising inflation and an economy largely recovering from the global pandemic. The Fed will raise interest rates 0.25%, which will trickle down to businesses and consumers.

But how does this work, exactly? What does the government have to do with interest?

Here’s what’s at play: banks are required to have a certain amount of cash at their disposal each night. If they don’t, they can borrow from another bank to cover the difference. The interest charged on those borrowed overnight funds depends on rates set by Federal Reserve. That interest rate is then passed along to borrowers like you and I, on things like mortgages, car loans, and credit cards.

It’s a tricky topic for anyone to understand, much less a teen. It brings up a larger one: talking economics with teens in the first place.

To some, economics is a stale subject best suited for elites in colleges and universities. To others, a study that begins in high school. But to the teen tycoons we regularly meet, economics are both interesting and well understood. 

The reason is simple: the economy affects everything, including the value of money itself. Just ask Biz Kid$ hosts Alex and Kaelon:

To a teen interested in making money, the economy is the invisible hand that affects their ability to both earn and spend.

For young entrepreneurs, economics affects the cost of materials and labor needed to create a product, impacts the prices a good or service can fetch, and for those in need of a loan, the cost of borrowing money. Consider the delicious supplies required by a chocolatier like Compartes:

For those who prefer employment, the economy impacts the minimum wage, shapes the benefits used to sweeten the deal, and changes the likelihood of a teenager’s chances of being hired over more experienced adults. (Remember this summer’s insane benefits?! A once-in-a-lifetime economic disruption was to thank.)

The bottom line? The economy isn’t only important — it’s interesting. Teens know it, teens affect it, and teens are ready to learn all about it.

Looking for economic lesson plans, clips, and activities? Our dedicated Economy page is just the ticket.