What it is
A rate cut occurs when a central bank lowers its target for the federal funds rate, which is the interest rate banks charge each other for overnight lending of their excess reserves. This action signals an easing of monetary policy, making it cheaper for banks to borrow money. In turn, banks typically pass on these lower borrowing costs to consumers and businesses through reduced interest rates on loans, mortgages, and credit cards. The primary goal of a rate cut is to stimulate economic activity by encouraging borrowing, spending, and investment, thereby boosting employment and growth.
Markets react to rate cuts by often seeing bond yields fall and stock prices rise, as lower borrowing costs can boost corporate profits and consumer spending. For example, a lower federal funds rate typically translates into lower mortgage rates, making housing more affordable and potentially stimulating the real estate market. Investors follow FOMC announcements, which explicitly state changes to the federal funds rate target, and adjust their portfolios based on the expected impact on various sectors and asset classes.
Why it matters
Rate cuts make borrowing cheaper, potentially increasing your purchasing power for big-ticket items like homes and cars, and can boost stock market performance by stimulating economic growth.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice