When the Federal Reserve (Fed) cuts interest rates, it means the central bank is lowering the benchmark interest rate, which is the rate at which banks lend money to each other overnight. This rate influences many other interest rates in the economy, including the rates on mortgages, car loans, credit cards, and business loans. A Fed rate cut generally aims to make borrowing cheaper for consumers and businesses. Lower borrowing costs encourage spending and investment, which can stimulate economic growth and support employment. This action often occurs when the Fed perceives economic growth is slowing or the job market is weakening, and it wants to prevent a rise in unemployment. However, a rate cut comes with trade-offs: while it can boost the economy, it might also risk higher inflation if the economy grows too quickly. The Fed balances this against its dual mandate to promote maximum employment and stable prices. Most recently, the Fed cut its key rate by 0.25 percentage points due to concerns about a slowing labor market and economic uncertainty. This was the first cut since late 2024, lowering the rate range to 4.0%-4.25%, with expectations of further cuts to help support growth and job creation amid ongoing inflation pressures.

Key Points

• The Fed's interest rate cut lowers the cost for banks to borrow and lend money.
• This generally leads to lower borrowing costs for consumers (mortgages, credit cards, car loans) and businesses.
• It aims to stimulate spending, investment, and hiring by making credit cheaper.
• The Fed cuts rates when economic growth slows or the job market stalls to support employment.
• There is a balancing act between stimulating growth and controlling inflation.
• Recent rate cuts in 2025 reflect concern over a cooling job market and uncertain economic conditions.