If you follow financial news, interest rates come up constantly. The Fed hints at a hike and stocks drop. It hints at a cut and crypto rallies. And somehow, when rates go up , bond prices go down . That seems backwards at first. Shouldn't higher rates mean you earn more? And why would a central bank raise rates when prices are already too high? Here's how it all connects. What Is an Interest Rate? An interest rate is the price of borrowing money. If you borrow $1,000 from a friend and agree to pay back $1,050 in a year, the principal is $1,000 and the interest is $50. That's a 5% annual rate. A bank loan works the same way. Interest Rate vs. the Fed Funds Rate The rate you hear about in the news is different. In the U.S., the Federal Reserve (the Fed) sets a target for the federal funds rate . Other countries have their own central banks, like the Bank of Korea or the European Central Bank. This policy rate influences what banks charge each other, and that f...