The Federal Reserve has raised short-term interest rates, doing so for only the second time since the 2008 financial crisis. The move reflects the Fed's growing confidence that the economy is on a sustainable growth footing — and its judgment that inflation is becoming a bigger danger to the US economy than sluggish growth or another recession.
A central bank like the Fed faces a basic trade-off between economic growth and inflation. When the Fed cuts interest rates — or keeps them low — more cash flows into the economy and business tends to boom. That's good up to a point, but if the Fed provides too much stimulus, it can lead to high inflation. The Fed made that mistake in the 1970s, when inflation reached double-digit levels.
Conversely, when the Fed raises interest rates — as it did today — less cash flows into the economy. That can lead to slower economic growth, with fewer jobs created and slower wage growth.