After two years of higher borrowing costs, the Federal Reserve has shifted course, cutting its benchmark interest rate to the lowest level in three years. The decision marks a turning point in the nation’s monetary policy and signals both concern and optimism about where the economy is headed.
For consumers and businesses alike, the change raises an important question: Will lower rates be enough to keep growth steady in the face of mounting economic uncertainty?
The move responds to signs of a slowing economy. Employment growth has cooled, and more people are leaving the labor force altogether. At the same time, the Fed’s proactive rate cuts are meant to act as a cushion, making it cheaper to borrow and invest. The challenge lies in finding the right balance between stabilizing growth and avoiding a deeper downturn.
To explore these dynamics, Seth Pruitt, associate professor of finance in the W. P. Carey School of Business at Arizona State University, offers his perspective on what the Fed’s recent actions mean for consumers, businesses and global markets. A former senior economist at the Federal Reserve Board, Pruitt brings an insider’s view of how policymakers interpret data, assess risk and anticipate the ripple effects of rate changes at home and abroad.
Question: The Fed recently cut the benchmark interest rate to its lowest level in three years. Is this a good sign for the economy?
Answer: In one way it’s bad, and in another way it’s good.
The Fed lowered the rate because it sees increasing economic risks. It is particularly concerned that employment and real economic growth could fall in the future. Currently, the unemployment rate is holding steady — an important indicator. At the same time, more people are leaving the labor force; these individuals are not employed but also not counted as unemployed because they aren’t looking for work“Understanding the Strength of the Dollar,” Journal of Financial Economics, June 2025. . Consistent with that, employment growth rate is slowing. These deteriorating current conditions — and what they signal for the future — contributed to the Fed’s decision. So, in one way, the rate cut is bad.
At the same time, the Fed cuts rates proactively. It’s like seeing someone take medicine: It’s not good that they’d need it, but the medicine will help. Lower interest rates encourage economic activity now by making it cheaper to borrow, which stimulates spending and business investment, all else equal. The Fed’s goal is to boost the economy through its decision. So, in another way, the rate cut is good.
Q: Most people associate an interest rate cut with home lending and purchasing. Why are changes in interest rates vital to this sector?
A: Houses are expensive enough that millions of Americans take out a mortgage to purchase one. The interest rate on that mortgage is the cost of borrowing money, which significantly affects the total cost of the house to the buyer.
Say the mortgage rate drops from 7% (where we’ve been in the past two years) to 6% (where we might be headed). That one percentage point drop will lower a conventional mortgage payment by about 10%. So even small rate cuts can translate into noticeable decreases in monthly mortgage payments.
Q: So will these Fed rate cuts lower mortgage rates? Will they lower interest rates for credit cards? How does this impact personal debt in general?
A: Fed rate cuts affect other interest rates, but not directly. The Fed directly influences the rates banks use to lend to each other. This flows out of the economy because it costs less for the banks to make loans. All else equal, banks are willing to make loans at lower interest rates.
Interest rates paid by businesses and consumers are higher than the Fed rate — this difference is called the interest rate spread. Spreads respond to many factors: borrower risk, loan demand and banks’ predictions of future rates. Since the Fed’s rate cut reflects increased macroeconomic risk, spreads could increase as the Fed rate falls, potentially canceling out the effect.
These spreads move differently for different types of loans. A mortgage is a collateralized loan — if you don’t pay, the bank takes your house. A credit card balance is uncollateralized — the bank can’t take the items you bought. One of those items might have been last night’s dinner — a bank can’t foreclose on that.
Over the past year, the benchmark rate has come down about 100 basis points (there are 100 basis points in one percentage point). Average mortgage rates have fallen by about 60 basis points, auto loan rates by 20 and credit card rates by just 10. So we might expect mortgage rates to fall somewhat less than Fed rate cuts, and consumer loan rates much less, if at all.
Q: Does lowering the interest rate have an impact on what global central banks do?
A: There are big differences between countries, but global forces affect them simultaneously. Sometimes, central banks around the world move in similar ways for that reason. The Fed’s cut could signal that global economic conditions are expected to worsen, prompting other central banks to act similarly.
These moves can really move exchange rates. These exchange rates are crucial for multinational companies who operate in various currencies, as well as the large, globally-connected banks that service business and consumers around the world. The dollar-exchange market is the largest in the world, and Fed rate cuts move those prices a lot.
Q: There’s talk of another potential cut in December. How likely is that, and what would that mean going into 2026?
A: Prediction markets currently suggest about a 75% chance of a December rate cut, a level that’s held above 70% for the past month. A December rate cut looks likely, and its prediction tells us that the Fed doesn’t forecast economic activity to pick up much before we enter 2026.