US recession

Will US economy fall into recession?

First let us see what is recession?

"A recession is a decline in economic activity of a country, lasting more than a few months or even years.”

What does the Fed (US’ central bank) rate cut mean or why does the Fed cuts the rate so often?

Recently, Federal Reserve Board announced an emergency cut of 0.75 per cent in short-term rates. When the Fed cuts the interest rates, it expects the business community to borrow more money from the banks to invest in their business. On the other hand it expects their people to borrow more money and spend it, which will once again result in more sales for the companies that will make profits and re-invest their profits to expand their business. This is expected to trigger a chain-reaction that will prop up the economy.

The low interest rate will also mean discouraging the people to keep money in the banks. Your deposits in the banks will earn less interest, while you may think that it would be profitable to spend the money rather than save.


What connection it has with India?
When the Fed cuts the rate, people in US may move their money to countries where their deposits will earn more interest. If the bank interest rates in India are more than the US, people in US will feel it would be better if they invest their money in India and earn more interest on their deposits. That is the main reason why the interest rate cut in US propels the stocks markets in India. When the Fed cuts the interest rates, more people take their money out of US and invest in a place like India, where the returns from the stock markets are the best in the world.

Will the interest rate cut boot the economy immediately?

The benefits of a rate cut take at least six months to percolate through the economy.
Million dollar question
After the rate cut, the interest rate now stands at 3.5 per cent. What would the US do if the interest rate touches zero?
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