The Federal Reserve, often called “the Fed,” serves as America’s central bank and plays a crucial role in managing the nation’s monetary policy. Think of it as the bank for banks—it regulates financial institutions, maintains economic stability, and controls the money supply to keep inflation in check and employment levels healthy.

One of the Fed’s most powerful tools is setting short-term interest rates, specifically the federal funds rate. This is the rate at which banks lend money to each other overnight, and it serves as the benchmark for many other interest rates in the economy. 

When the Fed raises or lowers this rate, it creates a ripple effect throughout the financial system. The next rate decision will be announced on Wednesday, Sept. 17 at 2pm EST. 

President Trump has been pressuring the Fed to cut its funds rate and so far the Fed has resisted. But economists and reporters are suggesting the Fed is likely to reduce the interest rate. Just how far, we will all have to wait and see. 

So let’s break down what a rate cut might mean for both consumers and businesses. 

Lower interest rates act like economic stimulus, making money cheaper to borrow and encouraging spending and investment. For citizens, this can translate into tangible benefits. Mortgage rates typically fall, making homebuying more affordable and allowing existing homeowners to refinance at lower payments. Credit card rates decrease, reducing the cost of carrying debt. Auto loans become cheaper, making car purchases more accessible.

Savers, however, face a trade-off. Bank account interest rates and CD returns typically decline, meaning less income from savings accounts, which in turn encourages people to invest in stocks or spend money rather than keep it in low-yield savings accounts.

Businesses can benefit significantly from lower rates. Companies can borrow more affordably to expand operations, purchase equipment, or hire employees. This increased business investment often leads to job creation and economic growth. Small businesses particularly benefit, as access to affordable credit can make the difference between expansion and stagnation.

Lower rates can also boost the stock market, as investors seek higher returns than those available from bonds or savings accounts. This wealth effect can increase consumer confidence and spending.

While lower rates can stimulate growth, they can also fuel inflation if the economy overheats. When inflation does increase the Fed will often increase the funds rate, which often reduces lending, cools off the economy and brings inflation back down. 

The Fed is keeping a close eye on the employment numbers as they consider rate cuts. A recent CBS News article reads “Meanwhile, the labor market is showing signs of distress, with many sectors — including manufacturing, which Mr. Trump has vowed to revive — shedding jobs in August. The result is a marked slowdown in hiring, with employers adding an average of 29,000 each month from June through August, versus about 106,000 workers each month in 2024.” 

And then there are Trump’s tariffs. In a speech given back in August Federal Reserve Chair Jerome H. Powell said “The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts.”

The Fed has an important balancing act here and must carefully weigh these effects. Understanding this delicate balance helps explain why Federal Reserve decisions capture such widespread attention and impact daily financial decisions for millions of Americans.