Federal Reserve Cuts Interest Rates; What Does that Mean to the Average Consumer?

There has been a lot of talk about a recession looming and fears of an economic downturn. But what does all this mean to the average person? This article is intended to help explain some of the basics of what is happening to the economy right now and how it is going to affect individual consumers.

The Federal Reserve cut interest rates to try to fend off a recession. They cut the federal funds rate (also called the fed funds rate) by 3/4 of a percentage point. The fed funds rate is the rate that banks can charge when they lend money to other banks. Banks are required by law to keep a certain amount of money on hand that they cannot reinvest so that they don't run out of money.

But if banks do run out of money they can just borrow it from another bank. So when the Fed cut the fed funds rate, they made it easier for banks to borrow from one another which increases the money supply available. What this means for the consumer is that it is also easier for an individual to borrow money from the bank. When the interest rates that banks have to pay goes down, the interest rate that they charge on loans to consumers goes down. It also means that the interest rates people earn on their savings accounts goes down.

Why is the Fed doing this? Right now, they are afraid the economy is going into a recession. It's possible the economy is in a recession right now or it's possible that it won't go into a recession at all. It is very difficult to tell what is happening because the economy is so massive and complex, but there are indicators that suggest that it has been growing at a pace it cannot sustain and that it's time to slow down.

The Fed wants interest rates to go down to encourage people to spend their money rather than save it which then encourages the economy to grow again. No one knows whether or not there will be a recession but one of the best ways to prevent one or at least lessen the blow is to do what the Fed is doing now by trying to make conditions conducive for spending.