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
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.
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