The Federal Reserve’s recent cut of the key interest rate was the first such move since it cut rates to nearly zero during the financial crisis a decade ago. The move reduced the federal funds rate, which is what banks charge each other to borrow money from one another, from 2.5 percent to 2.25 percent. The Federal Reserve uses interest rates as a lever to either stimulate or moderate the economy while balancing maximum employment with stable inflation. In the case of the most recent rate cut, the Federal Reserve said the rationale was to protect the growing economy from uncertain international trade factors and slowing growth abroad.

Interest rates can have a meaningful impact on employment because the cost of borrowing is passed from banks to businesses, which in turn may have to decrease investment or even lay off workers if operating costs are too high as a result of higher interest costs. As a consequence, this leads to decreases in consumer spending and demand for products, which in turn leads to cutting wages in other sectors of the economy. On the other hand, if interest rates are cut, banks will lower their interest rates, which encourages spending by businesses and households.

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