On Wednesday, the Federal Reserve may finally ease interest rates, which have been at their highest in a generation. This could mark the start of a new period with lower borrowing costs for those looking to finance a home, a vehicle, or a credit card.

In recent statements, Fed Chair Jerome Powell indicated that “the time has come” for a potential rate reduction during the September meeting, which wraps up today. The question that remains is: how significant will the cut be? Predictions vary between a decrease of 0.25% and 0.50% to the benchmark federal funds rate, which is currently at a 23-year high.

The primary federal interest rate is actually a range, sitting between 5.25% and 5.5% since July 2023 after a series of hikes aimed at controlling skyrocketing inflation. Consequently, mortgage rates, auto loan rates, and credit card rates have soared to record levels.

The two-day Fed meeting will conclude with an announcement at 2 p.m., followed by a press conference held by Powell at 2:30 p.m. Investors are keenly observing the developments.

What will be on the Fed’s agenda in today’s meeting?

With annual inflation dropping to its lowest in over three years in August, the Fed’s concerns around rising prices have diminished. Instead, the committee is focusing on another key part of its dual mandate: ensuring maximum employment.

In a speech in Jackson Hole, Wyoming, in August, Powell stated: “The time has come for policy adjustments. The direction is clear, and the timing and scale of rate reductions will be influenced by incoming data and changing conditions. We aim to bolster a strong labor market while continuing to work towards price stability.”

Since that address, signs of a cooling labor market have emerged. In August, the job gains were less than expected, and there were significant downward revisions to the previous two months’ employment figures. This report reinforced expectations for a rate cut on Wednesday to help maintain the job market’s strength, although the magnitude of the cut remains uncertain.

– Medora Lee

When did the Fed last lower rates?

It may feel like ages ago, but the last time the Federal Reserve reduced interest rates was in March 2020, right as the COVID-19 pandemic began.

During that month, the Fed implemented a variety of strategies to mitigate the economic fallout from the pandemic, slashing short-term interest rates to near-zero, injecting liquidity into the financial system, and stimulating more bank loans to individuals and businesses.

These actions were supported by then-President Donald Trump, as they aimed to counter the looming recession anticipated by many forecasters.

Dovetailing those efforts, the Fed’s policymakers agreed to cut its benchmark federal funds rate by a full percentage point, bringing it to a range of 0% to 0.25%. That marked the final rate cut during the pandemic era.

– Daniel de Visé, Paul Davidson

How is the stock market responding to the Fed meeting?

The stock market presented mixed signals when trading opened on Wednesday, with stocks rising on hopes that the Federal Reserve will announce its first interest rate reduction in four years.

Shortly after trading began, the Dow Jones Industrial Average was down 0.2%, while the Nasdaq Composite saw a 0.2% increase. The S&P 500 was steady.

While most analysts expect a rate cut today, opinions are divided on the extent of the cut. About two-thirds forecast a half-point reduction, while the other third predicts a more conservative quarter-point decrease. This level of unpredictability is unusual since the Fed typically provides clear guidance ahead of significant meetings.

Recently, stock indexes have been approaching record territory, partly because investors anticipate a Fed rate cut.

– Daniel de Visé

Why might the Fed lower interest rates?

The central bank lowers interest rates to reduce borrowing costs for consumers and businesses, helping to stimulate a sluggish economy or prevent a recession. Conversely, it raises rates or maintains them at elevated levels to moderate growth and curb inflation. The high inflation rates experienced in 2022 and 2023 prompted the Fed to increase rates, leaving the benchmark rate at a 23-year peak.

Almost all analysts anticipate a rate cut on Wednesday, yet they remain divided on how large this reduction may be: one-quarter or half a point. The uncertainty surrounding Fed decisions adds an unusual sense of suspense as meetings usually provide clearer signals about intentions.

“It’s a coin toss,” stated Nationwide Chief Economist Kathy Bostjancic.

– Paul Davidson

When will a rate cut go into effect?

Interest rates do not instantly change when the Federal Reserve modifies its benchmark federal funds rate.

So, what can consumers expect in the hours and days following a rate cut?

When the Fed lowers rates, it reduces the interest that commercial banks pay on overnight loans between themselves, as explained by Investopedia.

A reduction from the Fed doesn’t immediately alter interest rates across every sector of the economy. Specific types, such as mortgage rates, may take time to adjust, but some loans may react almost instantaneously, according to experts.

“Usually, the changes are seen the following day,” Nathan Rogge, CEO of First Pacific Bank, told Marketplace. “If it’s a Wednesday, you can expect different interest rates by Thursday.”

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