What to Know as the Fed Prepares to Cut Interest Rates: NPR

The US Federal Reserve is set to start cutting interest rates for the first time since 2020, but there's a big question looming: How far will they go?

The decision won’t be easy. For more than a year, the Federal Reserve has kept borrowing costs at their highest levels in more than two decades. That’s made it more expensive to get a car loan, finance a business, or carry a credit card balance.

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

This ambiguity has made this meeting one of the most anticipated in a long time.

Here are three things to know ahead of the Fed's decision, which is scheduled for Wednesday at 2 p.m. ET.

What's at stake at the Fed meeting?

The only certainty is that the central bank will cut interest rates. This is not a “stop the printing presses” headline. Fed Chairman Jerome Powell announced this almost a month ago.

But the extent of the rate cut remains in doubt.

It’s a tough call. Inflation has fallen sharply, with consumer prices rising at a 2.5% annual rate in August, down from the pandemic peak of 9.1% in June 2022. But prices are still rising somewhat faster than the Fed would like.

Meanwhile, the U.S. labor market is starting to show some weakness. Hiring has slowed and the unemployment rate has risen, reaching 4.2% last month.

Overall, the data does not point to a clear direction, meaning the Fed could go either way.

Some economists who are concerned about the labor market think the Fed should take more action, cutting interest rates by half a percentage point. Others say the Fed should be more patient, starting with a quarter-point cut as it continues to assess incoming data.

What do the markets expect?

Bets on a quarter-point or half-point rate cut have swung wildly on Wall Street. As of late Tuesday afternoon, investors thought a larger rate cut was about twice as likely as a quarter-point cut.

The size of the rate cut is sure to create divided opinions in the markets, but analysts also say at least one thing is clear: Wednesday's rate cut will not be the last.

Investors expect the Federal Reserve to continue cutting interest rates in the next few months, marking a turnaround from an unusual period in the U.S. economy when the bank had to raise interest rates sharply to combat rising inflation.

Uncertainty about the pace of rate cuts will persist — but Wall Street also has other things to look forward to, including the looming presidential election.

September is historically a bad month for markets — and in election years, that tough period extends into October. Investors are also watching the tech sector, which has been volatile amid concerns that companies are spending too much on artificial intelligence for too little return on their investment.

There is a lot to contend with, and analysts are urging investors to be patient.

“I’m a little bit skeptical that lowering interest rates would reduce uncertainty,” says Stephen Whiting, chief investment strategist at Citi Wealth.

But Whiting also noted that some of that uncertainty is likely to fade in the coming months, especially after the U.S. elections.

“Ultimately, we will have a clearer direction,” he added.

Regardless of size, how will a rate cut affect the US?

The cost of borrowing money will become slightly lower. Interest rates on car loans and credit cards are expected to fall slightly. On the other hand, the interest rate that people with money in the bank receive on their savings may also fall.

Meanwhile, mortgage rates have already fallen in anticipation of the Fed’s move. The average 30-year home loan rate is now 6.2%, the lowest since February 2023. That’s still above rates around 3% common during the pandemic, but it’s well below last year’s peak of nearly 8%.

But there's one thing to keep in mind: Whether the Fed cuts interest rates on Wednesday by a quarter point or a half point, it will take some time before those lower rates make a real difference to the economy.

Monetary policy is like hot water in some old house. You can pump the water until it is hot, but it still takes a while before it gets hot.