• Interest rates are a key economic factor that determine how expensive it is to borrow money and how much interest can be earned by lending or saving money. The U.S. Federal Reserve, or "Fed", sets the interest rate that banks charge one another to borrow money, called the federal funds rate. Interest rate cuts can have a variety of economic impacts.
  
  

Savings Rates

• When the Federal Reserve cuts interest rates, lending institutions like banks typically follow suit, by lowering the interest rates on their financial products, such as mortgages, auto loans, savings accounts and certificate of deposit accounts. Falling interest rates can put negative pressure on the savings rate, since lower interest rates earned by savings accounts will make alternatives to savings accounts more attractive to savers.
  
  

Investment

• Cutting interest rates is a way that the Federal Reserve can encourage investment and attempt to revitalize a poorly performing stock market. For instance, someone might be content to save their money in a high-interest savings account at a 5 percent interest rate. If their interest rate fell to 1 percent, they might decide instead to put their savings into investments like stocks, bonds, or mutual funds.
  
  

The Burden of Debt

• Interest rate cuts can reduce the burden of debt while encouraging borrowing. For instance, if a homeowner has a mortgage that is fixed at 7 percent, an economic slowdown might make the owner unable to service their loan. If they can refinance their mortgage at 5 percent due to lower interest rates in the economy, it would reduce their monthly payments, which might allow them to stay in their home. Less burdensome debt encourages consumer spending, since financing for items like cars and expensive electronics becomes relatively cheaper. Increased consumer spending can lead to higher economic output and job creation. Cutting interest rates is one of the main tools the Fed has to attempt to jump start a sluggish economy.
  
  

Education

• While the nominal cost of education--the amount higher learning institutions actually charge for tuition--has increased in the U.S. over the past decade, lowering interest rates reduces the cost of education by decreasing the amount of interest accrued by student loans. Making education more accessible through low interest rates can help create a more skilled work force.