What just happened?

The US Federal Reserve (Fed), easily the largest and most powerful central bank in the world, just decreased its Federal Funds Interest Rate by 50 basis points (bps) to a reference range of 5.0-5.25% percent. This is the first time that the US interest rate has been cut since March of 2020 and represents a major policy shift for the Fed.

Why did the Fed cut interest rates?

The US Fed, headed by Fed Chairman Jerome Powell, cut interest rates for the first time in four years in order to alleviate pressure underpinning the US economy and help keep the largest economic region in the world healthy. Interest rates impact a wide range of economic aspects, including how much it costs to borrow money to finance business operations. With interest rates easing, businesses may be more inclined to step up their pace of borrowing and explore more hiring and production activities. Also, consumers may be more inclined to increase their level of spending on a credit basis, both because it will be slightly easier to obtain bank-funded credit, and also because saving their money will have a slightly less-attractive rate of return versus going ahead and spending it. In this way, central banks can discourage consumers from actively saving more money than they otherwise would have by making the rate of return on savings less attractive, pushing more money into the domestic economy.