When the Federal Reserve cuts interest rates, it means the Fed is lowering the target range for the federal funds rate, which is the interest rate at which banks lend to each other overnight. This rate is a benchmark that influences other interest rates in the economy, including those for consumer loans, mortgages, and credit cards. Lowering this rate generally makes borrowing cheaper for banks, which tends to reduce borrowing costs for businesses and consumers. The purpose of cutting interest rates is to stimulate economic growth by encouraging more borrowing and investing. It can help boost spending by consumers and businesses, which can inject capital into the economy and potentially increase economic activity. This is especially important when the economy is slowing down or the job market is weak. However, lower interest rates also carry risks, such as potentially fueling excessive growth that leads to inflation, encouraging risky investments, and affecting people who depend on interest income, like retirees. The Federal Reserve carefully monitors economic data to decide when a rate cut is appropriate to balance stimulating growth while keeping inflation in check. Recently, the Fed cut rates to respond to signs of a slowing labor market and economic activity, aiming to support employment and stabilize inflation around its 2% target. This rate cut was the first since late 2024, reducing the federal funds rate target range to 4%–4.25%, and it signals the possibility of further reductions if the economic situation warrants it.