Fed Rate Cut Effects

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The objective of the Fed's moves is a balance of low inflation (meaning low long term rats) and solid economic growth. 

 

Part One - More Money to the Banks

The Federal Reserve can lower rates by injecting money into the banking system.  It does this by buying U.S. Treasury Securities from Banks.  

Payments for the securities increase the bank reserves. (money in their safe)  

Banks don't like to keep money around that's not working for them.  After all, they have people to pay.  So banks then cut short-term interest rates to spur lending of their reserves.  

 

Part Two - Borrowing - Giving money to the people

People then borrow more money, because rates are lower.  This can be in the form of short terms loans, car loans, credit card debt, or business debt.

Since people have more money, they spend it.

Or people take money that is in a nice, safe, bank account, and since the deposit interest rates are low, they invest it in the stock market.

 

Part Three - More help from overseas

With rates lower, many foreign companies that have money here move their money to other countries, seeking higher investment yields.  To do this, they have to sell dollars.

This lowers the exchange rate, and makes our goods and services that we export cheaper for other countries to buy.

 

Part Four - The Stimulus

 

This means other countries buy our goods, our people buy more goods with their money - which means factories have to make more - increasing the Gross Domestic Product - growing the economy!  

 

And of course, when the economy grows, there is a risk of inflation, which raises long term rates.  This is why you will see mortgage rates rise at some point as the Fed continues it's cuts.