The Federal Reserve is on track to cut interest rates. Here's what to know

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

It will not be an easy call. For more than a year, the Fed has kept borrowing costs at their highest level in more than two decades. This makes 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 clear it will cut interest rates, it must decide whether to opt for a modest quarter-percentage-point rate cut or a more aggressive half-a-point cut.

That uncertainty makes this meeting one of the most anticipated in some time.

Here are three things to know ahead of the Fed's decision, due out Wednesday at 2 pm ET.

What is at stake in the Fed meeting?

The only certainty is that the central bank will cut interest rates. It's not exactly a “stop the press” headline. Fed Chairman Jerome Powell telegraphed this about a month ago.

It is the size of the rate cut that is in doubt.

It's a tough call. Inflation has eased significantly, with consumer prices rising 2.5% annually in August, down from a pandemic peak of 9.1% in June 2022. But rates are still climbing somewhat faster than the Fed would like

At the same time, the US job market is starting to show some weakness. Hiring has slowed and unemployment is rising, hitting 4.2% last month.

After all, the data isn't pointing in a clear direction, meaning the Fed could really go either way.

Some economists who worry about the labor market believe the Fed should deliver even bigger, half-a-percentage-point cuts. Others think the Fed could be more patient, starting with a quarter-percentage-point cut while it evaluates incoming data.

What is the market expecting?

Bets on a quarter versus a half-percentage point cut are swinging wildly on Wall Street. As of late Tuesday afternoon, investors thought a major cut was about twice as likely as the quarter-point move.

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

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

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

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

That's a lot of manipulation, and analysts are urging investors to be patient.

“I'm a bit skeptical about the reduction in rate cut uncertainty,” said Steven Witting, chief investment strategist at Citi Wealth.

But Witting also noted that some of that uncertainty will likely die down in the coming months, especially after the U.S. election.

“Finally, we will get a clear direction,” he added.

No matter the size, how will the rate cut affect the US?

Borrowing money is going to get a little cheaper. Interest rates on car loans and credit cards should be reduced slightly. On the other hand, for people who have money in the bank, the interest rate on their savings may also decrease.

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. That's still higher than the typical rate of about 3% during the pandemic, but it's down significantly from last year's peak of about 8%.

But here's one thing to remember: Whether the Fed cuts rates by a quarter-percentage-point or a half-percentage point on Wednesday, it will take some time for these falling rates to really make a difference in the economy.

Monetary policy is like hot water in some old houses. You can heat the water all the way up, but it still takes time to get there.