Do Interest Rates Go Down in a Recession?

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If you’re living in a time of rising inflation, you may hear about the Federal Reserve (or the Fed, for short) increasing interest rates. Inflation is essentially the devaluing of currency over time. If inflation happens too rapidly, people’s purchasing power decreases, and less money circulates into the economy.

Key Takeaways

• A recession is when the economy experiences negative GDP growth and a slowdown in other areas.
• Interest rates typically fall once the economy is in a recession, as the Fed attempts to spur growth.
• Refinancing debt and making more significant purchases are ways to take advantage of lower interest rates.

Raising interest rates is one way the Fed attempts to combat this. When interest rates go up, people are less likely to borrow and spend, which can help drive down demand and prices. The Fed can reign in excessive growth by raising interest rates, which keeps money out of the economy.

The Fed also relies on interest rates when the economy enters a recession. In this article, we’ll explore what it means when the Fed lowers interest rates and discuss how you can take advantage of your increased borrowing power.

What Is a Recession?

Let’s first make sure we understand what a recession is. Historically, economists define a recession as a period of prolonged economic decline. One rule of thumb for calling recessions is two consecutive quarters of negative gross domestic product (GDP) growth.