what does it mean when the fed cuts interest rates

When the Federal Reserve (the Fed) cuts interest rates, it means the Fed is lowering its target for the federal funds rate, which is the interest rate banks charge each other for overnight loans. This action generally lowers borrowing costs for consumers and businesses, encouraging more borrowing and spending, which can stimulate economic growth. It is typically done when the Fed wants to support a slowing economy or a weak job market. However, cutting rates can also increase inflation risks if done excessively. The Fed's rate cut influences other interest rates like mortgage rates, credit card rates, and auto loans, often making credit cheaper for households and businesses. This can lead to increased investment and consumption, giving an economic boost. But if rates are too low for too long, it can lead to excessive growth and inflation or cause investors to take on more risk. The recent Fed rate cut in 2025 was aimed at addressing a slowing labor market while inflation remained above the Fed's 2% target. The cut also signals potential further rate reductions to support the economy amid job market challenges and external economic pressures. In summary, a Fed interest rate cut means making borrowing cheaper to stimulate economic activity, usually in response to signs of economic slowdown or job market weakness, with careful consideration of inflation risks.