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Here's why the Fed keeps raising interest rates and what it means in a bear market

The Federal Reserve raised interest rates by the highest margin in nearly three decades Wednesday. That comes as the stock market tumbles in bear territory.

GREENSBORO, N.C. — Americans are spending $346 more a month compared to last year because of inflation, according to Moody's Analytics

It's leading to some really tough choices. 

We're going to Dig In 2 a new plan to lower those prices: the Federal Reserve just announced they will raise interest rates in the biggest increase since 1994. 

We'll explain why that could make a difference, but first, let's explain why prices are so high right now. 

Economy 101: 

To understand why prices are going up, let's head back to Economy 101: Supply and demand. 

When there is more demand than supply, businesses can raise prices. 

For the past two years, we've all heard about supply chain issues. 

The pandemic limited supplies going out. 

At the same time, when people came out of the shutdown, they were ready to spend. 

Many Americans saved money when they weren't traveling and going out. 

Plus, we had all those stimulus checks and historically low interest rates - making it cheaper to get a home or car loan. 

Too many people wanted to spend all that extra cash, and businesses ran out of supply. So, businesses raised prices. 

Now, the Federal Reserve wants to hit the breaks on all that consumer demand to help bring prices back down. The Fed increased interest rates by three-quarters of a point - the largest jump in almost 30 years. 

Inflation and interest rates:

Inflation persists everywhere. Each month, there's another report showing prices at some of the highest levels in four decades. The most recent data showed consumers paying 8.6% more than they were last year.

The Federal Reserve has raised interest rates twice already. It increased rates by 0.25% in March and 0.5% in May.

So, why does the Fed want to do it again? Inflation remains really high, and data showed people started to slow their spending. 

High inflation has forced Americans to really separate wants from needs. 

Retail sales fell 0.3% in April. Furniture and home furnishing stores saw sales drop almost a full point, according to the U.S. Commerce Department.

We all know how crazy the housing market is. Since rates went up, sales dropped 8.5% in March, then 16.5% in April. It's slow, but there's evidence showing the interest rate hikes have done their job and slowed spending. 

RELATED: Housing bubble: What it is and why we aren't seeing one now | Dig In 2 It

Federal Reserve Chair Jerome Powell said Wednesday he expects other rate increases to come in the future. If prices don't follow, the results could be bad.

"[The Fed] could actually tip us into a recession if they go too far, too fast," CBS News' Business Analyst Jill Schlesinger said.

It's still too early to know the long-term consequences of the rate increases. Powell said the Fed is committed to getting prices back down.

Working to get the Supply Chain back: 

Driving down demand is part of the solution. We all need the supply chain to recover. 

President Joe Biden believes we're seeing some relief there too. 

"Delivery times are actually quicker than they were before the pandemic. And today, there are actually about 40% fewer containers clogging the dock for long periods of time than there were last November. This May was the strongest month in the Port of Los Angeles' history," Biden said. 

RELATED: 5 ways the bipartisan $1.2 trillion infrastructure law impacts you | Dig In 2 It

The president said the infrastructure law passed in Congress in the fall of 2021 also helped rebuild supply chains. 

The act allocates about $175 billion to roads, bridges and railroads. That helps truckers and cargo trains transport goods quicker, which allows supply to keep moving across the country. 

Bear Market:

Right now stocks are in a bear market. That means the market fell at least 20% from a recent high. The S&P 500 dropped 21.3% from January.

Following the Fed's interest rate increase, the stock market rallied. It's unclear if the strong showing will be short-lived or is a sign of sustained improvement to come.

RELATED: Wall Street enters a bear market as the S&P 500 dives 3.9%

What you should do:

The economy is in a tough spot right now. The good news is you can set yourself up for success if you act now.

Here's four things to do to make the interest rate increase work for you.

  1. Call your credit card provider and ask for a lower. More often than not, they'll work with you.
  2. See if you can transfer your balance to a credit card with a 0% introductory entrance rate. Make sure you pay off all your bills before the special rate ends.
  3. Get your credit card back up. Loans will get more expensive as the Fed raises rates to fight inflation. If you have a high score, you have better odds of getting a lower rate. Make on-time payments every month.
  4. Shop around for high-interest savings accounts. This will be a great time for you to accrue interest on your savings with rates high.

The bear market might have you feeling uneasy about your portfolio. Experts said you don't need to panic and pull all your money out of the market. It can actually be a great time to invest.

George Nesseti, a financial advisor, said you can maximize your 401(k) by increasing your contributions. That allows you to buy low in more stocks. 

"It's all about now, now in this environment, losing less," Nesseti said. "When the market does come back, you're in position to gain more."

If you're older, you should remain conservative since you're more likely to have a fixed income.

RELATED: Finding the right retirement plan for you | 2 Wants to Know

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