This week, the Federal Reserve met and dropped interest rates for the first time since 2020, targeting the Federal Open Market Committee at around 4.75% to 5.25%. The U.S. economy has grown substantially, and high interest rates could trigger higher inflation. The Federal Reserves decided to cut them, focusing on fighting further inflation and job growth. This rapid cut is higher than what the Federal Reserve was expecting. Curbing inflation in 2022, the interest rates rose to 5.5%, the highest over two decades.
When the Federal Reserve cuts interest rates, it lowers the Federal Fund’s target, which is the rate banks charge when meeting the Federal Reserve requirement. Rate cuts are substantial because the Federal Fund is an example of how banks charge their best customers. The Federal Reserve lowers interest rates to control inflation and stimulate economic growth. This allows people and businesses to invest and borrow money. If there is too much growth, inflation occurs and rates must be increased.
When the Federal Reserve rate lowers, interest rates also lower. Lower interest rates will help borrowers, but they will hurt lenders and savers. This is because banks will make less money on each loan they sign, savers earn less on their savings accounts and people are likely to take on more debt instead of saving as they would with higher interest rates. Whenever individuals put money into the bank, they can make money off of the yield of savings, which makes them more money whenever the interest rates are of a high enough percentage.
As inflation peaked in June 2022 and rose to 9.1%, it has fallen to 2.5%with the recent cut. However, as inflation has begun to calm down, unemployment advanced to 4.2%, 0.4% higher than it was this time last year. Unemployment rates are rising due to the higher percentage of labor force growth, which is at its highest this year. The last time the labor force growth rate was this high was in 2001. This past summer, temporary layoffs were higher; of the 352,000 individuals laid off, 249,000 were temporarily laid off. However, lower rates increase employment, and the Federal Reserve has been increasingly worried about the job market, especially after this past summer.
Reducing rates can help consumers save money, lower mortgage and car payments and allow investors to take advantage of better purchasing power. Higher interest rates make items more expensive for consumers to purchase. By cutting rates in the hopes of lowering inflation, consumers would be able to buy more without paying more back. With this current cut, most won’t feel the full impact on their loans since the average of credit cards is 23.18% for new offers and 21.58% for existing accounts.
The Federal Reserve’s rate cut will allow inflation to lower, interest rates to lower and the employment rate to go up. Investors and borrowers will benefit from the rate cut, and savers must find a way to increase their funds since the yield of savings will be lower. Cutting rates will allow the economy to calm down and slow inflation. Investment into businesses will also increase, creating a more robust economy.
