What will a US Federal Reserve interest rate cut mean for me?

Compared to other central banks, the Fed is a bit late to the rate-cutting party.

Europe, the UK, New Zealand, and Canada have cut rates already, and so have many banks in emerging markets.

Those banks all had their own reasons for cutting rates, and how low the Fed decides to go depends a bit on what’s pushing it to act.

The Fed raises or cuts rates in response to two factors: inflation and employment.

In 2022, when the Fed started raising interest rates, officials were focussed on inflation and wanted to get consumer prices, then rising at the fastest pace since the 1980s, to stabilise.

A jump in rates tends to bring down prices by making it harder to borrow, so people spend less on everything from consumer goods to homes and business equipment.

But less demand also means the economy isn’t growing as quickly, and if it slows too much and actually starts contracting then that’s a recession.

In the past, the US economy has often entered recession after a series of rate hikes, costing millions of people their jobs.

And over the last year, unemployment in the US has been ticking higher, as hiring slows sharply.

So is the Fed cutting rates because it has triumphed in its fight against inflation or because the economy is in peril?

Many analysts maintain it’s the former. Price inflation hit 2.5% in August.

Officials have said they’re increasingly confident inflation is headed back to normal, so their attention is turning to the risks to the job market.

One factor officials have insisted does not factor into their decision is the election.

Republicans and Democrats have been watching this Fed’s moves closely for two years, and a cut will likely help Democrats as the party in power.

But Fed chair Jerome Powell has said time and again that the bank is focused on economic data, not politics, in making its move.