When the Federal Reserve (the Fed) cuts interest rates, it means the central bank is lowering the target for the federal funds rate, which is the rate banks charge each other for overnight loans. This rate influences many other interest rates in the economy, including those on credit cards, mortgages, and business loans. The goal of cutting rates is usually to stimulate economic growth by making borrowing cheaper for consumers and businesses, thereby encouraging spending and investment. Lower rates can also help boost hiring in a slowing labor market. However, rate cuts can have downsides such as increasing the risk of inflation if the economy overheats or encouraging excessive risk-taking by investors. The Fed typically cuts interest rates in response to signs of economic slowdown or a weak job market, aiming to keep inflation under control while promoting employment. For example, recent rate cuts in 2025 were driven by a softening labor market and the need to support economic growth despite inflation remaining above the Fed's 2% target. Rate cuts lower borrowing costs immediately for households with variable rates and may eventually lower fixed loan rates. The Fed's decisions are independent and based on balancing these economic factors.
In summary, a Fed interest rate cut means cheaper borrowing costs intended to stimulate economic activity and support employment, while also carrying risks like potential inflation rise and increased financial risk-taking.
