When the Fed cuts interest rates, it affects everything from your savings account to your auto loans
- The Federal Reserve lowered interest rates as a response to an economic slowdown caused by the coronavirus.
- The Federal Open Market Committee, the policymaking branch of the Federal Reserve, sets meetings eight times throughout the year to discuss the federal funds rate, or the interest rate which banks pay each other to borrow. They also make emergency decisions like this one.
- When this rate decreases, it’s passed along to consumers, lowering the costs of borrowing for consumers and encouraging economic growth.
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The Federal Reserve and its policymaking branch, called the Federal Open Market Committee, are in charge of controlling the growth and size of the economy, and they do it through interest rates.
Interest rates do a lot to encourage spending and saving — when rates go down, consumers are more likely to spend rather than save, and inject more money into the economy. So, when they meet, they sometimes decide to change the federal funds rate, or the interest rate that banks charge each other for loans. This interest rate influences all the rest — when it’s cut, borrowing becomes cheaper and saving becomes less lucrative to encourage spending.
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[Source: Business Insider]