Federal Rate Cut?

Question

Please help me understand this. what does it mean when the Feds will cut the rate? What happens when the rate is cut? Who gets affected by it. I heard on the news today and i think this happens every quarter?

Answer 1

This can be confusing so I'd suggest you search the internet for more insight but.........basically, when the economy appears to be slowing down (like now), the Federal Reserve will lower the Discount Rate in an effort to stimuate the economy. The Discount Rate is the short term rate that banks lend to each other for overnight loans between themselves. In other words, if banks can borrow money cheaper, they can (not always) pass on those savings to their customers, both personal and commercial. When borrowing becomes cheaper for folks like us, we're more likely to buy stuff, which helps the economy. When businesses can borrow money cheaper, they're more likely to expand, hire new employees, etc., which also helps the economy. It's tricky though.........an economy that's too healthy usually equates to higher inflation, which in turn will slow down the economy down the road. The trick is to find the discount rate "sweet spot" which is always a moving target depending on the normal ebbs and flows of the economy. It doesn't happen every quarter. It happens whenever the Federal Reserve thinks it's needed to jump start or slow down the economy.