Interest rates are usually lower during a recession, but individual rates can move at different times and by different amounts. In the United States, the Federal Reserve often lowers the federal funds rate to reduce borrowing costs, support spending and investment, and limit job losses. Federal Reserve research on recessions around 1990, 2001, and 2008-2009 found that the federal funds rate fell roughly 5 percentage points on average in the two years following those business-cycle peaks. Inflation, financial-market stress, and lender risk can keep some rates high.
Interest Rates During a Recession at a Glance
| Rate type | What usually happens | Important limitation |
|---|---|---|
| Federal funds rate | Usually falls | The Fed may delay cuts if inflation remains high |
| Treasury yields | Often fall, sometimes before the recession begins | Long-term yields depend on market expectations |
| Mortgage rates | May fall | Mortgage spreads can widen during financial stress |
| Credit card APRs | Variable APRs may fall after the prime rate falls | Fixed APRs may not change, and issuer margins remain |
| Auto and personal loan rates | May fall | Lenders may charge more for credit risk |
| Savings account rates | Often fall as short-term rates decline | Fixed-term deposits may keep their agreed rate |
Why Does the Federal Reserve Lower Rates in a Recession?
The Federal Reserve lowers its policy rate during many recessions because weaker spending and business investment often occur alongside rising unemployment. A lower federal funds rate reduces the short-term funding cost for banks.
Lower rates can make mortgages, auto loans, business loans, and other forms of credit less expensive. Cheaper borrowing may encourage households to spend and businesses to invest, which can support economic activity.
Do Interest Rates Fall Before a Recession?
They can. Financial markets often anticipate weaker economic growth before official data confirms a recession. If investors expect the Federal Reserve to cut rates, short-term market rates and some longer-term yields may fall before the first official rate cut.
Long-term interest rates reflect expectations about future monetary policy and economic conditions, not only the Federal Reserve's current federal funds rate. Treasury yields and mortgage rates can therefore move lower before a recession officially begins.
Do Mortgage Rates Go Down in a Recession?
Mortgage rates often decline during a recession, but they may not fall immediately.
The federal funds rate is an overnight bank-lending rate. Thirty-year fixed mortgage rates are more closely linked to longer-term Treasury yields and mortgage-backed securities. Mortgage lenders also add a spread for interest-rate risk, prepayment risk, and broader financial conditions.
During a normal economic slowdown, falling Treasury yields can push mortgage rates lower. During a financial crisis, mortgage spreads can widen. That increase can partly offset or temporarily exceed the effect of falling Treasury yields.
A recession alone does not guarantee that mortgage rates will reach their lowest level or fall at the same pace as the federal funds rate.
What Happens to Credit Card Interest Rates?
Variable-rate credit cards generally use an index such as the U.S. prime rate. Because the prime rate typically moves with the federal funds rate, a Federal Reserve rate cut can eventually reduce the APR on a variable-rate credit card.
A fixed-rate credit card does not automatically become cheaper after a Fed rate cut. Credit card issuers can also maintain a margin above the prime rate, so the total APR may decline by less than the federal funds rate.
When Might Interest Rates Stay High During a Recession?
Rates may stay high when inflation remains a serious problem. A recession does not require a central bank to cut rates if policymakers are still trying to control rising prices.
The Federal Reserve has a dual mandate to promote maximum employment and stable prices. A supply shock involving energy, food, or other essential goods can create weak growth and high inflation at the same time. In that situation, the Fed may keep rates elevated even as economic activity weakens.
Rates can also stop falling when the policy rate approaches zero. The Federal Reserve may then use other tools, including forward guidance or asset purchases, to support financial conditions.
How Does a Recession Affect Borrowers and Savers?
The effect depends on whether the debt or deposit rate is fixed, variable, or tied to market rates.
Borrowers
Borrowers with variable-rate debt may benefit if the Federal Reserve cuts rates. The effect is usually faster for products tied directly to the prime rate and slower for loans priced from longer-term market rates.
Borrowers with fixed-rate debt do not receive an automatic payment reduction. They may benefit later by refinancing, but refinancing only makes sense when the new rate and closing costs produce meaningful savings.
Savers
Savings account and money-market rates often decline when short-term interest rates fall. Fixed-term certificates of deposit can continue paying their agreed rate until maturity, depending on the account terms.
Homebuyers
Lower mortgage rates can reduce monthly payments, but recessionary conditions can also affect employment, home prices, lender approval standards, and household income. A lower advertised rate does not remove those risks.
Bottom Line
Interest rates usually go down in a recession, especially the Federal Reserve's policy rate and other short-term rates. Mortgage rates and other consumer borrowing rates may also decline, but inflation, Treasury yields, lender risk, and financial-market conditions affect how quickly and how far they move.
The practical rule is simple: a recession usually creates downward pressure on interest rates, but it does not guarantee that every rate will fall immediately.