Why the Federal Reserve Cut Interest Rates

Why the Federal Reserve Cut Interest Rates

The federal reserve cut the interest rate to a point between 0.25% and 0% as a stopgap measure to prevent the market from plummeting into a free fall. Because of the coronavirus, our market has fallen into a bear market state, meaning that we have lost at least 20% of our previous market value. So why did the federal reserve cut interest rates? To help bailout our plummeting economy. 

How Interest Rates Work

“Interest rate levels are a factor of the supply and demand of credit: an increase in the demand for money or credit will raise interest rates, while a decrease in the demand for credit will decrease them. Conversely, an increase in the supply of credit will reduce interest rates while a decrease in the supply of credit will increase them,” states Investopedia.

What Does This Mean for our Economy?

The federal reserve has pulled out its largest weapon in its arsenal to protect our economy. The rest is up to us. When every American stops spending money that creates a loss for businesses, scaring investors away and ultimately leading to a recession.  That’s why the US government has put so much into keeping our economy afloat. For example, the senate just passed a 300 billion dollar bill that would give paid sick leave, free coronavirus testing and give relief to small businesses and cut taxes for large corporations.

With another bill waiting to be voted on by the house of representatives worth 1 trillion dollars, the government may help bail our economy out of another recession. On the other hand, it is quite possible that our economy could be headed for another recession, however as previously stated, the metaphorical buck stops with you. Don’t stop spending money at local businesses, support them just as you have been. Simply order take out or delivery services.

What Should We Plan for?

Planning is important and making sure that you stay safe is the most important part of planning. However, if we can prevent a recession in the process that would be ideal. Make sure you have your normal amount of groceries, not more than you need, but what you would normally buy for two weeks. Prepare to hunker down in your home, you can even use this time to clean or rearrange your home. Try to keep spending the money you would usually spend from your home. Get delivery, or buy a piece of art from a local artist, just keep spending.

Finally, make sure that you understand what is happening and how it could negatively affect you and your family. Please also understand I am not an economist and I am going off the information provided by reputable news sources. Please consult your financial adviser or do further research into the matter yourself.

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