When interest rates are cut, borrowing becomes cheaper, which can stimulate economic activity by encouraging businesses and consumers to take out loans for investments and spending. Lower interest rates also tend to reduce the cost of existing debt with variable rates, such as credit cards and some mortgages, leading to lower monthly payments. However, the returns on savings and investments like bonds typically decline, making it harder to earn high interest on deposits. Rate cuts are usually intended to support economic growth, especially when the economy slows down or faces labor market weaknesses. Specifically, the Federal Reserve's recent rate cuts aim to:
- Decrease borrowing costs immediately for those with variable-rate loans.
- Encourage spending and investment by businesses and consumers.
- Result in lower yields on savings products, making it tougher to earn interest income.
- Potentially stimulate job growth by supporting economic activity.
- Possibly lead to inflation risks if done too quickly or extensively.
This balancing act between encouraging growth and managing inflation is the key reason central banks reduce interest rates, especially when the economy shows signs of slowing or weak job growth.