Simply put, a reduction in interest rates in the American economy means that the central bank (the Federal Reserve) lowers the cost of borrowing. Here’s the meaning in an easy way:

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📉 What is a reduction in interest rates?

It is the reduction of the base interest rate that is used when banks lend to each other, and it affects other interests such as loans, credit cards, and mortgages.

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💡 Why is interest reduced?

To stimulate the economy when it is slow or threatened by recession, by:

1. Encouraging people and businesses to borrow due to the lower cost of loans.

2. Increasing spending and investment.

3. Raising employment rates.

4. Lowering the value of the dollar which helps American exports.

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⚠️ But it has side effects:

It may lead to increased inflation.

Weak returns on bank savings.

It could lead to financial bubbles if borrowing and investment in risky assets increase.

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A simple example:

If you have a credit card or a loan, and the interest is reduced, you will pay a lower amount each month on that loan.