What is a rate cut?
In one line: A rate cut is when a central bank lowers its main interest rate, usually to make borrowing cheaper and support a slowing economy.
A simple example
Cuts are measured in basis points, like hikes. One basis point is 0.01%.
Say the Fed's target range is 5.25% to 5.50%, and it cuts by 50 basis points. The new range is 4.75% to 5.00%. That's what the Fed did in September 2024, its first cut after the 2022–2023 hikes.
A cut of 25 basis points is the more common step.
Why central banks do it
A cut makes borrowing cheaper. That can encourage spending, hiring and investing. Central banks cut when:
- Inflation has cooled toward their goal (2% for the Fed).
- The job market or economy is slowing.
- Something breaks and markets need support, as in March 2020.
How markets often react
No reaction is guaranteed, but common patterns are:
- The currency can weaken, as lower rates attract less money.
- Bond prices tend to rise and yields fall.
- Stocks can be supported by cheaper borrowing.
A common mistake
Thinking every rate cut is good news. Why the bank is cutting matters. A calm cut because inflation has cooled is one thing. A fast, emergency cut because the economy is in trouble is another. Stocks fell sharply during the cuts of 2001 and 2008, because the Recession was the bigger story.
Markets usually price in expected cuts weeks ahead. The surprise, and what the central bank says about the next move, often matter more than the cut itself.
Our FOMC meeting guide shows how to read a decision day, and CPI and FOMC days covers how to plan around it.
Questions
Do rate cuts make stocks go up?
Often, but not always. If cuts come because the economy is weakening fast, stocks can fall anyway.
How do rate cuts affect savings?
Savings accounts and short-term bonds tend to pay less soon after a cut.
What is an emergency rate cut?
A cut made between scheduled meetings because of a sudden shock. The Fed did this in March 2020.
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