When you hear the news talk about cutting interest rates they are probably talking about the rates banks charge each other. Banks have to keep a certain percentage of the money in their customers accounts in cash. Since banks make money by turning that cash into loans they try to keep it as close to the minimum as possible. Loans are constantly being repaid and accounts are constantly being putting more or less money in to so sometimes they are a little over or a little under. If a bank goes under the limit they will borrow from another bank for a few days. It is this interest rate that banks charge each other that the fed tries to control since it is a good indication of how much money is in the economy and generally what interest rates are.

The federal reserve controls these interest rates indirectly. The board of governors meet every six weeks to decide what the target rate for banks to charge interests should be. If the fed wants interest rates to go down they will buy bonds from banks. The more cash within the banking system and economy in general the more extra cash banks have to loan each other. If the fed wants to raise interest rates it sells bonds to banks.

The fed lowers interest rates when the economy is doing poorly and raises them when it is doing relatively well. Lower interest rates means more loans which means more new businesses and investments in capital(factories,tools etc.) which means more jobs and economic growth. Why not have low interest all the time? Inflation. If the fed tried to keep rates low all the time it would have to constantly be putting more money into the economy which would cause large inflation. The fed has a trade off between low inflation and a temporary economic boost.