How does the Fed's action of raising interest rates typically affect the economy?

The action of the Federal Reserve raising interest rates is generally perceived as a measure to control inflation and stabilize the economy. When interest rates are increased, borrowing costs for consumers and businesses rise. As a result, consumers may reduce their spending on goods and services since loans for items like homes, cars, and credit card debt become more expensive. Similarly, businesses may hesitate to invest in new projects or expansion due to higher costs associated with financing.

This tightening of credit and the resultant decrease in consumer spending and business investment typically leads to a deceleration in economic growth. When people spend less and companies invest less, overall economic activity slows, which can prevent the economy from overheating but can also hinder growth prospects in the near term.

In contrast, the other options suggest outcomes that are inconsistent with the typical effects of raising interest rates. For instance, raising rates would not stimulate consumer spending or signal an expansionary monetary policy, as such a policy typically involves lowering interest rates to encourage growth. Additionally, higher interest rates tend to discourage business investment rather than increase it, as the costs of financing make such investments less attractive.