The Federal Reserve's interest rate hikes are typically in increments of 25 basis points (bps) because it allows for a gradual and predictable increase in interest rates. A basis point is equivalent to 0.01%, so a 25 bps increase would mean a 0.25% increase in interest rates.
The Federal Reserve sets the target range for the federal funds rate, which is the interest rate at which banks lend to each other overnight to meet reserve requirements. By adjusting the federal funds rate, the Fed can influence borrowing and spending in the economy, which can impact inflation and employment levels.
Incremental increases of 25 bps allow the Federal Reserve to adjust the federal funds rate in a way that doesn't shock the economy or financial markets. A sudden large increase in interest rates could disrupt financial stability and cause economic volatility. Therefore, a gradual and predictable increase in interest rates is generally preferred.
