In order to control inflation, one of the Federal Reserve’s main tools is the federal funds rate, which is the rate banks charge each other for overnight loans. If that rate goes up, banks generally pass on their additional cost.
Even though the Fed does not directly control all interest rates in the country, when it raises the fed funds rate, other interest rates eventually follow, including those applied to adjustable-rate mortgages, credit cards, home equity lines of credit, and other loans.
Higher rates slow borrowing, cool off an overheated economy and ward off inflation spikes.
