The US central bank cut interest rates for the first time in four years on Wednesday.

This long-awaited measure will affect mortgage, credit card and savings rates for millions of people in the US – and indeed around the world.

The Federal Reserve cut its key lending rate by half a percentage point, to a range of 4.75% to 5%.

What does this mean for you?

The Fed’s key lending rate — the rate it charges banks for loans — sets the basis for what companies charge people in the U.S. for loans, such as mortgages, or other debts, such as unpaid credit card bills.

That rate has been hovering around 5.3% for more than a year, the highest level since 2001, after rising from near zero to almost zero in early 2022.

A rate cut will provide welcome relief for borrowers, but it is also likely to mean that some banks will cut the interest rates they offer savers.

Mortgage rates in the US have already fallen slightly, partly in preparation for the decline.

Americans will be most directly affected by any change. But central banks with currencies pegged to the dollar often tie their rate decisions to the Fed, as do Hong Kong and many Gulf states, so borrowers in those countries will also feel an impact.

For the many people outside the US who invest in the US stock market, a cut would likely also be good news.

Lower interest rates often cause stock prices to rise. This is for two reasons.

First, it means that companies can take on debt more cheaply and reinvest it to make the business more profitable.

Secondly, lower interest rates make savings accounts and other types of investments less attractive. This makes investors tend to move their money to stocks, for example.

Compared to other central banks, the Fed is a little late in cutting rates.

Europe, the UK, New Zealand and Canada have already cut rates, as have many emerging market banks.

The Fed lowers or raises interest rates in response to two factors: inflation and employment.

When the Fed began raising rates in 2022, authorities were targeting inflation and seeking to stabilize consumer prices, which were rising at their fastest pace since the 1980s.

A rise in interest rates usually causes prices to fall, because it becomes harder to borrow money. This causes people to spend less on everything from consumer goods to homes to business equipment.

But less demand also means that the economy grows less quickly. And if growth slows down too much and even starts to shrink, we are talking about a recession.

Historically, the US economy has often entered a recession after a series of interest rate hikes, causing millions of people to lose their jobs.

And over the past year, unemployment in the US has continued to rise as employment declines sharply.

Did the Fed cut rates because it won the battle against inflation or because the economy is in danger?

Many analysts claim it is the former. Price inflation reached 2.5% in August.

Officials have indicated they are increasingly confident that inflation will return to normal, and are therefore focusing on risks to the labor market.

Officials have stressed that one factor does not play a role in their decision: the elections.

Republicans and Democrats have been watching the Fed’s moves closely for two years. A cut would likely benefit Democrats, as the party in power.

But Fed Chairman Jerome Powell has said time and again that the bank’s decision is based on economic data, not politics.

The move was certainly unexpected.

Ahead of the meeting, analysts were divided over whether the Fed would announce a rate cut of 0.25 percentage point or opt for a larger and more unusual cut of 0.5 percentage point.

Most thought a cut of 0.25 percentage points was most likely, but that did not happen.

For a bank that has made every effort to announce its decisions well in advance, the level of uncertainty was unusually high.