Economic analysts predict that the Federal Reserve will again decrease its primary interest rate this Wednesday, despite a recent rise in inflation and a robust economic situation.

The anticipated quarter-point reduction would be the third consecutive rate cut, bringing the Fed’s benchmark short-term rate down to a range of 4.25% to 4.5%. This follows a period where rates were raised to combat a significant inflation surge tied to the pandemic, reaching a peak of 5.25% to 5.5% in 2022 and 2023.

The central bank reduces rates to lower borrowing costs, encourage economic growth, or recover from a recession. Conversely, rate increases are implemented to control inflation by cooling down the economy and labor market.

Here’s what you need to know:

What are the impacts of reducing rates?

The impending rate cut is likely to affect the financial sector, leading to lower interest rates for credit cards, car loans, home-equity lines of credit, adjustable-rate mortgages, and business loans. However, it may also lead to a decrease in interest rates for bank savings accounts, which have only recently started providing more attractive yields after a long period of minimal returns.

Why is the Fed considering a rate cut?

Despite a recent uptick in overall inflation and a stable economy, the Fed is opting to lower rates as annual price increases have generally declined—from about 7% in mid-2022 to 2.3% currently, based on the Fed’s preferred metric, which still exceeds its 2% target. By reducing rates, the Fed aims to align them with more typical levels now that inflation has moderated, avoiding adverse impacts on growth or the risk of inducing a recession.

Moreover, while inflation has recently increased, key contributors like rent, auto insurance, and car repairs showed more modest price rises in November, which may help result in softer inflation rates in early next year.

What does the Fed predict for interest rates in 2025?

With the anticipated rate cut, much of the upcoming discussion will focus on the Fed’s projections for future rates. Fed officials are expected to forecast three quarter-point rate cuts for the following year, a revision from the four cuts initially anticipated in September, according to estimates by Goldman Sachs and Oxford Economics. Barclays has suggested that a projection of just two cuts could be possible.

Insights from the Fed’s statement or comments from Fed Chair Jerome Powell during a press briefing might suggest a potential halt in rate reductions in January, economists indicate.

“The main takeaway we expect…is that the Fed anticipates slowing the pace of rate cuts moving forward,” Goldman Sachs expressed in a research report.

Why does the Fed foresee fewer rate cuts next year?

Recently, inflation has surpassed the levels Fed officials predicted in September, and the unemployment rate is likely to conclude the year at a lower level than estimated, according to Goldman. Furthermore, President-elect Trump has threatened broad tariffs on imports, which could increase inflation in 2025. This situation might make Fed officials more cautious regarding their rate cut forecasts, Goldman suggested.

Lastly, Fed officials have indicated that the “neutral” interest rate—which neither stimulates nor constrains the economy—might be higher than previously thought due to stronger growth and higher inflation than expected. As the Fed works to adjust its key rate to this “neutral” level, they may proceed with greater caution as they try to determine what that rate is, Goldman mentioned.

Both Goldman and Oxford predict that during the upcoming meeting, the Fed will slightly increase its estimate of the neutral rate to around 3%.

What inflation rate is expected for 2025?

Fed officials will likely revise their median inflation forecast upward to 2.4% for both this year and next, according to Goldman. They are also expected to update their economic outlook and lower their unemployment rate estimate, as noted by Goldman and Barclays.

These adjustments would help support the reasoning behind fewer anticipated rate cuts in the coming year.