I know they meet tomorrow and people are freaking out. Someone I know said it could be a catastrophic economic disaster based on their decisions. My question is…..what? I don’t get any of it at all. I’ve read articles and am trying to understand. What is a fed rate cut? How is that bad? What would it do? How would it cause an economic disaster? How would a rate cut lead to a recession?
Clearly, math and economics are not my strong suits and I want to be as informed as possible.
Thanks!
In: Economics
Ultra simplified version. Lower rates = more business growth but at the cost of a potential to raise inflation
Businesses want more growth so want low rates. But the government needs to keep inflation in check, its a balance. The rates rose a ton during covid to try to decrease inflation, and it worked, now they are coming back down as inflation has significantly decreased and is around 3% (A 2%-3% inflation is great, in fall 2022 during covid, inflation was ~8%!) So now that were’ at about 3%, everyone is saying rates are gonna go down.
Whoever your “friend” is probably has no concept what they are talking about, and rate changes are usually very minor at a time, and since they are so small, there is just about zero chance there could ever be an “economic disaster” from a tiny rate change (rate changes are usually a quarter point, thats a 0.25% change, rarely a half point 0.5% change) These are small. They are small on purpose. So that there aren’t big shocks or changes
The actual economics behind this are much more complicated, but for most people its totally irrelvant
A Fed rate cut lowers interest rates, making borrowing cheaper but potentially leading to excessive spending and inflation if not managed carefully.
The federal reserve has two jobs; keep unemployment low, and keep inflation low. This is known as the “dual mandate”. They try to accomplish that by, among other things, setting the interest rate for loans (indirectly. it’s complicated.). Business loans, mortgages, credit card loans, etc.
A high interest rate lowers inflation, but raises unemployment. A low interest rate lowers unemployment, but raises inflation. It’s a very delicate balancing act.
The inflation rate has been pretty good recently, and unemployment has ticked up, so people are expecting a rate cut. But inflation is still higher than we’d like, and unemployment is still low historically speaking, so some people are arguing that it’s too soon for a rate cut.
If they cut the interest rate too soon, it might bring back inflation. If they wait too long, it might cause a recession.
People are speculating about a 0.75 pt cut, which is aggressive, but not economy-destroying if it’s wrong. They can undo it if they need to.
A fed rate cut is when the Federal Reserve lowers interest rates. This can make it easier for people to borrow money and stimulate spending, but it can also cause inflation. It’s not necessarily bad, but it can have consequences. A drastic rate cut could lead to a recession if the economy becomes too dependent on low interest rates.
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