The US Federal Reserve has cut interest rates by 25 basis points (0.25%). Now the interest rate will be between 4.50% to 4.75%. Earlier on September 18, the Fed cut interest rates by 50 basis points (0.5%). The September cut was done after about 4 years. The Fed cut interest rates in September 2024 after March 2020. To control inflation, the Central Bank of America had increased interest rates 11 times between March 2022 and July 2023. Interest rates kept unchanged for the third consecutive time in 2023 Last year, the Federal Reserve kept interest rates unchanged for the third consecutive time in its policy decision. On July 26, 2023, the Fed kept the policy rate unchanged in the range of 5.25%-5.5% as per market expectations. However, the Fed had also indicated that there would be rate cuts in 2024 and they could come down to 4.6%. The Fed started raising rates from March 2022 to deal with inflation. By July last year, these rates had risen to a 23-year high. Fed rates determine how much interest banks will charge each other Federal rates determine how much interest banks will charge each other on loans given to each other overnight. But often it also affects consumer debt, mortgages, credit cards and auto loans. What could be the effect of cutting interest rates… Policy rate is a powerful tool to fight inflation Any central bank has a powerful tool to fight inflation in the form of policy rate. When inflation is very high, the central bank tries to reduce the money flow in the economy by increasing the policy rate. If the policy rate is high, the loan that banks get from the central bank will be expensive. In return, banks make loans costlier for their customers. This reduces the money flow in the economy. When money flow reduces then demand decreases and inflation goes down. Similarly, when the economy goes through a bad phase then there is a need to increase money flow for recovery. In such a situation, the Central Bank reduces the policy rate. Due to this, the loan that banks get from the Central Bank becomes cheaper and the customers also get loans at a cheaper rate.
