The U.S. central bank cut interest rates for the first time in four years on Wednesday.
The highly anticipated measure will affect mortgage, credit card and savings rates for millions of people in the U.S. and around the world.
The Federal Reserve cut its key lending rate by half a percentage point to a range of 4.75% to 5%.
So what does this mean for you?
What do cuts mean for mortgages, car loans and other debt?
The Fed’s prime lending rate — the rate it charges banks for borrowing — serves as the benchmark for the interest rate that companies in the United States charge for loans such as mortgages and other debts, such as outstanding credit card balances.
The rate has been hovering around 5.3% for more than a year since surging from near zero in early 2022, the highest level since 2001.
While the rate cuts will be a welcome relief for borrowers, they are likely to lead some banks to also cut the rates they offer depositors.
U.S. mortgage rates have already fallen slightly in anticipation of this move.
What will be the impact on the world?
Americans will be most directly affected by the policy change, but borrowers in countries like Hong Kong and many Gulf states with currencies tied to the dollar will also be affected because their central banks often link interest rate decisions to the Fed.
The rate cut is likely to be good news for many outside the United States who are invested in the U.S. stock market.
There are two reasons why stock prices tend to rise when interest rates fall.
First, it allows a business to borrow less capital and reinvest it to make its business more profitable.
Second, falling interest rates make savings accounts and other investments less attractive, so investors tend to move their funds into investments such as stocks.
Why did the Federal Reserve lower interest rates?
Compared to other central banks, the Fed has been a bit slow to cut interest rates.
Europe, the UK, New Zealand and Canada have already cut interest rates, and many banks in emerging markets are following suit.
The Federal Reserve lowers or raises interest rates depending on two factors: inflation and employment.
When the Fed begins raising interest rates in 2022, officials will be focused on inflation, hoping to stabilize consumer prices, which have been rising at their fastest pace since the 1980s.
When interest rates rise, prices tend to fall because it becomes harder to borrow money, leading people to spend less on everything from consumer goods to housing and commercial equipment.
But less demand also means the economy isn’t growing as fast, and if the economy slows down too much and actually starts to shrink, that’s a recession.
In the past, the U.S. economy has often fallen into recession after a series of interest rate hikes, causing millions of people to lose their jobs.
And after a sharp slowdown in hiring last year, the U.S. unemployment rate is trending higher.
So is the Fed cutting rates because it’s winning the war against inflation, or because the economy is in danger?
Many analysts argue it’s the former: inflation reached 2.5% in August.
With officials saying they are increasingly confident that inflation will return to normal, attention has shifted to risks to the job market.
One factor that officials say will not influence the decision is the election.
Republicans and Democrats have been closely watching the Fed’s actions over the past two years, and a rate cut would likely be beneficial for the ruling Democrats.
But Fed Chairman Jerome Powell has repeatedly said the move was based on economic data, not politics.
Was the half-percentage point cut a surprise?
The move was certainly unexpected.
Ahead of the meeting, analysts were divided on whether the Fed would announce a quarter-percentage-point cut or go for a larger, unprecedented half-percentage-point cut.
Many thought a 0.25 percentage point cut was most likely, but that did not happen.
The level of uncertainty was unusually high for banks that had worked hard to signal their actions well in advance.