Fed Chairman Jerome Powell prepares to speak at a conference in Washington, DC on November 8, 2023. The Fed is expected to cut interest rates for the first time since 2001 on Wednesday – but has yet to decide on the extent of the measure.

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Chip Somodevilla/Getty Images/Getty Images North America

The Federal Reserve is about to begin cutting interest rates for the first time since 2020, but there is a big question: How far will they go?

This will not be an easy decision. For over a year, the Fed has kept borrowing costs at their highest levels in over two decades. This has made it more expensive to take out a car loan, finance a business or carry a balance on a credit card.

Now that the Fed has made it clear that it will cut interest rates, it must decide whether to opt for a moderate quarter-percentage point cut or a more aggressive half-percentage point cut.

Because of this uncertainty, this meeting is one of the most eagerly awaited in a long time.

Here are three things to know ahead of the Fed’s decision, which will be announced at 2 p.m. ET on Wednesday.

What is the Fed meeting about?

The only thing that is certain is that the central bank will lower interest rates. That is not exactly a headline that forces you to shut down the central banks. Fed Chairman Jerome Powell announced it almost a month ago.

What remains unclear is the extent of the interest rate cut.

This is a difficult decision. Inflation has fallen significantly. Consumer prices rose 2.5 percent year-on-year in August, after peaking at 9.1 percent in June 2022 during the pandemic. But prices are still rising a little faster than the Fed would like.

At the same time, the US labor market is showing the first signs of weakness. The number of new hires has decreased and unemployment is slowly rising. Last month it was at 4.2%.

All in all, the data does not point in a clear direction, meaning the Fed could actually go in either direction.

Some economists concerned about the labor market say the Fed should intervene more, cutting rates by half a percentage point. Others say the Fed could be more patient and start with a quarter-percentage point cut while it continues to evaluate upcoming data.

What do the markets expect?

On Wall Street, bets on a quarter or half a percentage point cut fluctuated widely. By late Tuesday afternoon, investors believed a deeper cut was almost twice as likely as the quarter percent cut.

The magnitude of the rate cut is sure to divide opinion in the markets, but analysts say at least one thing is clear: Wednesday’s rate cut will not be the last.

Investors expect the Fed to continue cutting interest rates in the coming months, marking a turning point after an extraordinary period for the US economy in which the Fed was forced to raise interest rates significantly to combat rising inflation.

Uncertainty about the pace of interest rate cuts will persist – but Wall Street also has other tasks to deal with, including the upcoming presidential election.

September is historically a bad month for markets – and in election years, the dry spell extends into October. Investors are also keeping an eye on the technology sector, which has been unstable due to concerns that companies are spending too much on artificial intelligence and getting too little return.

It’s a lot to juggle, and analysts are urging investors to be patient.

“I’m a little skeptical that the rate cut will reduce uncertainty,” says Steven Wieting, chief investment strategist at Citi Wealth.

However, Wieting also noted that some of this uncertainty is expected to subside in the coming months, especially after the US elections.

“Ultimately, we get a clearer direction,” he adds.

Regardless of the magnitude of the interest rate cut, what impact will it have on the United States?

Borrowing money will become a little cheaper. Interest rates on car loans and credit cards should drop a little. For people with money in the bank, the interest rate on their savings could also drop.

Meanwhile, mortgage rates have already fallen in anticipation of the Fed’s move. The average rate on a 30-year home loan is now 6.2%, the lowest since February 2023. While that’s still higher than the typical rates of about 3% during the pandemic, it’s significantly lower than the peak of nearly 8% last year.

But there is one thing we should not forget: Regardless of whether the Fed cuts interest rates by a quarter of a percentage point or half a percentage point on Wednesday, it will take some time for the falling interest rates to actually make a difference to the economy.

Monetary policy is like the hot water in some old houses. You can turn the water all the way up, but it still takes a while until it’s hot enough.