What will the US interest rate cut mean for me?

On Wednesday, the U.S. central bank reduced interest rates for the first time in four years.

This highly anticipated move will affect mortgage rates, credit card rates, and savings rates for millions of people, not just in the U.S., but around the world.

The Federal Reserve has lowered the key lending rate by half a percentage point, bringing it down to 4.75% from 5%.

So, what does this mean for you?

What does a cut mean for mortgages, car loans, and other debts?

The Fed’s key interest rate, which is what banks charge each other for borrowing, acts as a foundation for what companies charge people in the U.S. for loans, like mortgages or other debts such as unpaid credit card balances.

This rate has been around 5.3% for over a year, the highest since 2001, after jumping up from near zero at the start of 2022.

A reduction will provide some relief to borrowers, though it may also mean some banks will offer lower rates to their savers.

Mortgage rates in the U.S. have already dropped slightly, partly due to anticipation of this move.

What could be the global impact?

Americans will feel the most direct impact of this change. However, central banks in countries with currencies tied to the U.S. dollar, like Hong Kong and many Gulf states, often adjust their rates based on the Fed’s decisions. Borrowers in these countries could also see an effect.

For many people outside the U.S. who are invested in the American stock market, a cut is likely good news.

Lower interest rates tend to boost stock prices for two reasons.

First, it means companies can borrow money at a lower cost and reinvest it to make their businesses more profitable.

Second, lower rates make savings accounts and some other types of investments less attractive, so investors tend to move their money into things like stocks.

Why did the Fed cut rates?

Compared to other central banks, the Fed was a bit late to the rate-cutting party.

Europe, the UK, New Zealand, and Canada had already cut rates, and many banks in emerging markets had done so as well.

The Fed adjusts rates in response to two main factors: inflation and employment.

In 2022, when the Fed began raising interest rates, officials focused on curbing inflation, which had been rising at its fastest pace since the 1980s.

Higher rates make borrowing harder, which usually brings prices down, so people tend to spend less on everything from consumer goods to homes and business equipment.

But lower demand means the economy doesn’t grow as fast. If it slows too much or contracts, it could lead to a recession.

In the past, the U.S. economy has often entered recessions after sustained rate hikes, leading to job losses for millions of people.

Over the past year, unemployment has risen in the U.S. as hiring has slowed significantly.

So, did the Fed cut rates because it has won the fight against inflation or because the economy is in trouble?

Many analysts think it’s a bit of both. In August, inflation reached 2.5%.

Officials have said they’re growing more confident that inflation is returning to normal, so their focus is shifting to the risks in the job market.

One factor that officials insist didn’t influence their decision: the upcoming election.

Republicans and Democrats have been closely watching the Fed’s moves for the past two years, and a rate cut could benefit the Democrats, who are in power.

But Fed Chair Jerome Powell has repeatedly said that the bank is focused on economic data, not politics, when making its decisions.

Was a 0.5% cut a surprise?

The move was definitely unexpected.

Before the meeting, analysts were divided on whether the Fed would announce a 0.25% cut or a bigger, more unusual 0.5% cut.

Most expected the 0.25% cut, but that didn’t happen.

For a bank that works hard to signal its moves in advance, the level of uncertainty here was unusually high.