Fed rate cut
ripple calculator
When the Federal Reserve cuts its rate by a quarter point, what actually happens? Follow one cut as it ripples out — through your loans, your savings, the money supply and the price of everything else.
How one rate cut moves the whole economy
The federal funds rate is the interest rate banks charge each other to borrow reserves overnight. On its own that sounds narrow — but because it's the cheapest, safest short-term rate in the system, every other rate is priced off it. Move it, and the change fans out through the entire economy. Economists call that fanning-out the transmission mechanism.
Cheaper to borrow, less to save
The first, fastest effect is on the price of money. Loans that float with the Fed — credit cards, variable mortgages, home-equity lines, most business credit — reprice lower within a billing cycle or two. The saver feels the mirror image: the yield on deposits and money-market funds slips by roughly the same amount. A cut is a quiet transfer from savers to borrowers, and the calculator shows both sides of it on your own balances.
Rate cuts and the money supply
Here's the part people find surprising. Most money isn't printed — it's created by banks when they lend. You take a loan; the bank credits your account with a new deposit that didn't exist a moment earlier. Spend it, and it lands in someone else's account, where it can be lent again. In the classic model, the only brake on this is the reserve ratio: the fraction of deposits a bank must hold back. The ceiling on money creation is the money multiplier:
At a 10% reserve ratio, every $1 of reserves can support up to $10 of deposits. A rate cut doesn't change the multiplier itself — it changes the appetite to use it, by making loans cheaper and idle reserves less attractive to sit on.
than live gauge. The US reserve requirement has
been 0% since March 2020, and the Fed steers rates
mainly through the interest it pays on bank reserves,
in an "ample-reserves" regime — not through scarcity.
The mechanism above is the intuition, not the plumbing.
Why cheaper money lifts asset prices
An asset is worth the value of its future income, brought back to today's money by discounting at the going rate. Lower the rate, and those future dollars are discounted less harshly — so they're worth more now. For a stream of income that runs forever, the maths is stark:
Cutting from 3.75% to 3.50% lifts the value of a perpetual income stream by about 7%. Real assets have shorter horizons and move less, but the direction is the same — and it's why stocks and property often jump the moment a cut looks likely.
The catch: inflation
If cutting rates makes everyone better off, why not cut to zero and stay there? Because cheap money boosts demand, and demand that outruns supply becomes inflation. The Fed is balancing a dual mandate — stable prices and full employment — and the rate is the dial between them. It cuts to support growth and jobs when it can afford to, and holds or hikes when prices run hot. The compound interest calculator shows the flip side of all this: what rates do for money left to grow.
What actually reaches you
Pass-through is uneven. Variable debt and savings reprice fast; long-term fixed mortgages barely flinch at a single overnight-rate move, because they follow long bond yields instead. Treat the figures here as the clean, first-order picture of a cut — the mechanism laid bare — rather than a promise about your exact bill next month.
Fed rate cut FAQ
It is the interest rate banks charge each other to borrow reserves overnight. The Federal Reserve sets a target range for it and steers the market rate toward that range, which makes it the anchor for almost every other interest rate in the economy. As of mid-2026 the target range was 3.50% to 3.75%.
Borrowing gets cheaper across the economy. Variable loans, credit cards and business credit reprice lower, which tends to encourage spending and investment. Savings yields fall at the same time, and lower rates generally push up the value of assets like stocks and property.
Cheaper credit encourages more borrowing, and in a fractional-reserve system each new loan becomes a new deposit that can be lent again, expanding the broad money supply. The theoretical ceiling on that process is the money multiplier, equal to one divided by the reserve ratio.
An asset is worth the present value of its future cash flows, discounted at prevailing rates. When the discount rate falls, those future flows are worth more today, so prices rise. Long-duration assets react most, which is why a small cut can move markets noticeably.
Only if your rate tracks the Fed. Variable-rate loans, credit cards and HELOCs usually reprice quickly. Fixed-rate mortgages are tied to long-term bond yields rather than the overnight rate, so they may not move much, or at all, from a single cut.
The money multiplier is one divided by the reserve ratio; at a 10% ratio it is ten. It is a useful teaching model, but a dated description of the modern US system: the reserve requirement has been 0% since March 2020, and the Fed now guides rates chiefly through the interest it pays on bank reserves in an ample-reserves regime, not through reserve scarcity.