Fed Chairman Jerome Powell prepares to speak at a conference on November 8, 2023 in Washington, D.C. The Fed is set to cut interest rates on Wednesday for the first time since 2001, but has yet to decide how big the measure will be.

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Chip Somodevilla/Getty Images/Getty Images North America

The Federal Reserve is set to cut rates for the first time since 2020, but the big question is: how far will it go?

It won’t be an easy decision. The Fed has kept borrowing costs at their highest levels in more than two decades for more than a year, making it more expensive to get 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 rates, it must decide whether to opt for a modest rate cut of a quarter of a percentage point or a more aggressive cut of half a percentage point.

This uncertainty has made this meeting one of the most anticipated in recent times.

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

What’s at stake at the Fed meeting?

The only certainty is that the central bank will cut rates. That’s not exactly a “stop the presses” headline. Fed Chairman Jerome Powell telegraphed it nearly a month ago.

It is the size of the rate cut that remains uncertain.

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

At the same time, the U.S. labor market is starting to show some weakness, with hiring slowing and unemployment rising, to 4.2% last month.

All in all, the data doesn’t point in a clear direction, meaning the Fed could go either way.

Some economists concerned about the labor market think the Fed should expand and cut by half a percentage point. Others think the Fed could be more patient and start with a quarter-percentage-point cut while the Fed continues to assess incoming data.

What do the markets expect?

Bets on a quarter versus half percentage point cut have skyrocketed on Wall Street. By late afternoon Tuesday, investors thought a bigger cut was nearly twice as likely as the quarter-point move.

The size of the rate cut will undoubtedly divide markets, but analysts also say one thing is clear: Wednesday’s rate cut will not be the last.

Investors expect the Fed to continue cutting rates in the coming months. This is a turning point after an exceptional period in the US economy, in which the Fed was forced to raise rates sharply to combat rising inflation.

Uncertainty about the pace of rate cuts will persist, but Wall Street has other things on its mind, including the approaching presidential election.

September is historically a bad month for markets, and in election years that rough patch extends into October. Investors are also keeping an eye on the tech sector, which has been volatile amid fears that companies are spending too much on artificial intelligence for too little return on their investment.

It is quite a challenge to take into account and analysts advise investors to be patient.

“I have doubts that the rate cut will reduce uncertainty,” said Steven Wieting, chief investment strategist at Citi Wealth.

But Wieting also indicated that some of the uncertainty is likely to diminish in the coming months, especially after the US elections.

“Eventually we will have a clearer direction,” he adds.

What impact will a rate cut have on the US, regardless of size?

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

Meanwhile, mortgage rates have already fallen in anticipation of the Fed’s move. The average rate on a 30-year mortgage is now 6.2%, the lowest since February 2023. That’s still higher than the 3% or so rates that were common during the pandemic, but it’s down significantly from last year’s peak of nearly 8%.

But keep one thing in mind: Whether the Fed cuts rates by a quarter of a percentage point or a half of a percentage point on Wednesday, it will take some time before this rate cut has any real effect on 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 to get there.