An increase in interest rates by the Fed means neither point you have posted.
The Federal Reserve attempts to control the growth of the economy by adjusting interest rates. The rate increase that is being most talked about is the rate that banks must pay each other for funds they are loaning between banks. If a bank has to pay more for funds than it can earn in it's operations, then the banks, theoretically, will stop lending money to each other.
There are other market methods the Fed has its disposal, but this one is the one I've seen most talked about currently.
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