It appears that the Fed is about to embark on a series of interest rate cuts. According to the CME FedWatch tool, the odds of a rate cut next month are almost 90%.[1] That, of course, is not only good for gold — it’s good for consumers because it lowers borrowing costs particularly on things like credit cards, mortgages, car loans, etc.
But the news is not all positive. Rate cuts can be a double-edged sword as excessive money supply can spike inflation, weaken the dollar, and trigger risk-taking that could ultimately crash the economy. The Fed must strike a balance and it is not only a delicate one — but also a dangerous one.
The Good: Lower Borrowing Costs
Simply stated, higher borrowing costs make consumers buy less and spend less. As payments on home loans, personal loans, auto financing and credit card balances increase, American consumers are left with less disposable income.
But when the Fed lowers rates, borrowing becomes cheaper and consumer spending tends to increase since loans and lending are at less of a premium.
According to Discover:
“Lower interest rates can help consumers save money, pay off their debt faster, and reach their financial goals sooner … When interest rates drop, the cost of borrowing may decline, as well. New borrowers aren’t the only ones who stand to benefit from lower rates, though; those with variable-rate loans might also see their interest costs drop. This is because many loans are tied to the prime rate, which is the interest rate banks use when loaning money to individuals and businesses. When federal rates decrease, the prime rate often follows.”[2]
So why doesn’t the Fed keep rates low all the time? Because low rates increase the risk of asset bubbles, speculative investing, lower returns on bonds and savings accounts, rising consumer debt, and lower bank profits which increase their fragility. Suffice to say, monetary policy is serious business.
According to macroeconomic thinktank Rosenberg Research, it’s important to understand the sweeping impact of rate changes across various levels of the economy.
“Interest rates are more than just numbers—they are a powerful economic lever that influences consumer behavior, business investment, and the broader pace of economic growth. Set primarily by central banks like the Federal Reserve, interest rate adjustments send signals that ripple across lending, saving, and spending decisions throughout the economy. Understanding how these changes affect financial outcomes is essential for both investors and decision-makers navigating today’s dynamic market landscape.”[3]
The Bad: Rising Inflation Risk
Since rate cuts make borrowing cheaper, they can also increase the money supply. As the cost of borrowing decreases, the demand for lending naturally increases as both businesses and consumers tend to take out more loans. And when banks issue new loans, they essentially create new money.
According to Investopedia,
“Savings decline, more money is borrowed, and more money is spent as interest rates go down. The total supply of money in the economy increases as borrowing increases. The result is a good side effect: fewer savings, more money supply, more spending, and higher overall economic activity.”[4]
But there is an unfortunate consequence to a flood of new money. To quote Nobel Prize winning economist Milton Friedman, it results in “too many dollars chasing too few goods” — which aptly describes inflation.
In general terms, inflation is the increase in the price of goods and services across a given economy and according to the Peter G. Peterson Foundation, it has punishing implications:
“The rate at which prices change can have ramifications across the economy, affecting businesses and consumers alike. For instance, when high levels of inflation occur, the value of one’s money (also known as purchasing power) erodes, as consumers are no longer able to buy as much product with the same amount of money. Likewise, if wages do not rise at a similar rate as prices, inflation can devalue people’s wages and savings and increase the cost of living.”[5]
Inflation is among the more dreaded economic conditions because it threatens our quality of life — and can dramatically impact our long-term savings and retirement accounts.
The Ugly: An Overheated Economy
When interest rates are cut too much and too often, the economy can experience unsustainable activity where demand exceeds supply and the production of goods and services reach the outermost limits of its capacity. This is called an overheated economy.
According to the Central Bank of Ireland:
“A fast-growing economy is desirable so long as that growth rate is sustainable. However sometimes the economy can grow too fast. In economics this is called “overheating”. Overheating is when the economy reaches the limits of its capacity to meet all of the demand from individuals, firms and government. One element of this is the concept of “full employment”, which occurs when almost everyone who wants to work has a job. When this happens, there is very little available slack. In other words, the amount of unused resources, or spare capacity in the economy – is very limited or non-existent.”[6]
The problem with economic overheating is that it almost always results in a dramatic cooling and a punishing downturn. Overheated economies that collapsed in crisis include the Great Inflation of the 1960s, the Stagflation of the 1970s, the Dot-com bubble of the early 2000s, and the U.S. Housing Bubble of 2007-2008.Remember, if monetary policy gets too loose and lending gets too slack — the resulting demand for goods and services could easily outpace supply resulting in soaring inflation, a falling dollar, rising asset bubbles, and widespread financial instability.
According to Investopedia, it’s important to remember that “changes in interest rates can have both positive and negative effects on the markets … Stock and bond investors must remain alert to the behavior of consumers and businesses in the wider world, and changes in interest rate can affect that behavior.”[7]
So, if the Fed is about to embark upon a rate cutting cycle — beware of a weakening economy, irrational exuberance, reckless borrowing, asset bubbles and a possible economic crisis.
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[1] https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
[2] https://www.discover.com/online-banking/banking-topics/whats-the-impact-of-low-interest-rates-on-my-financial-goals/
[3] https://www.rosenbergresearch.com/2025/05/23/the-impact-of-interest-rates-on-the-economy/
[4] https://www.investopedia.com/articles/economics/08/monetary-policy-recession.asp#
[5] https://www.pgpf.org/article/what-is-inflation-and-why-does-it-matter/
[6] https://www.centralbank.ie/consumer-hub/explainers/what-does-overheating-in-the-economy-mean
[7] https://www.investopedia.com/articles/stocks/09/how-interest-rates-affect-markets.asp
