How Big Will the Fed Rate Cut Be? Officials Need to Strike a Balance.

Jerome H. Powell, the Fed chair, will hold a news conference after the central bank’s 2 p.m. announcement, which will offer another window into future policy. Officials will also release a fresh set of economic projections, their first since June. Investors will closely watch those estimates for any hint at how quickly interest rates are expected to fall later this year and into next.

Here’s what to watch as the Fed gathers for one of its most consequential meetings in years:

• A shift in focus: For years, the Fed has focused mainly on prices, which were jumping out of control. But inflation has been coming down steadily. At the same time, the labor market has shown signs of cooling meaningfully. Given that combination, Fed officials want to begin lowering interest rates, which is akin to taking a foot off the economic brake, but the question is how much they should ease up.

• The case for a smaller cut: Lowering interest rates by a quarter point would start to take the pressure off the economy. But moving patiently and deliberatively would also avoid spurring a big economic acceleration — one that could keep prices rising, causing inflation to remain slightly too quick for comfort.

• The case for a bigger cut: Lowering rates quickly, by a half a point, could send a clear signal that the Fed stands ready to protect the job market, and lower borrowing costs could cushion the economy against more of a slowdown.

• The first of many cuts: Officials will also release an estimate of how much rates are expected to come down by the end of the year, along with projections for the next several years, in their economic forecasts on Wednesday. Market pricing suggests that investors expect Fed officials to cut borrowing costs by a full percentage point or more by the end of the year. The Fed meets again in November and December.

• Chair Powell speaks: Mr. Powell will hold a news conference after the release of the Fed’s policy statement and economic projections, and investors are sure to follow his every word for both an explanation of the Fed’s September decision and a hint at what might come next. The months ahead will be critical in determining whether the Fed chair and his colleagues have managed to coax inflation lower without severely hurting the economy in the process. Economic “soft landings” are rare, and pulling one off after roaring inflation would be a first in the United States.

Still, these officials have been wary of declaring victory too early. With stubbornly high inflation in the services sector and relatively strong wage growth, they have lowered interest rates slowly. Last week, the European Central Bank cut rates for the second time in three months and traders expect officials in the eurozone to wait until December before lowering rates again.

On Wednesday, inflation in Britain held at 2.2 percent in August, but policymakers at the Bank of England are expected to keep rates steady this week, having cut them already last month. Officials in Britain have said inflation has slowed enough to cut rates, which has brought some relief to mortgage holders and companies that need loans, but they are not confident that inflationary pressures have been completely stamped out.

Similarly, central banks in Norway and Sweden are also expected to hold rates at their meetings later in September, as they emphasize their gradual approach. The Swiss National Bank is expected to continue its quarterly interest rate cuts, which it started in March, when its officials meet later this month.

Policymakers “are pretty confident in the direction of travel for rates, that these need to come down, but that they need to be cautious,” said Katharine Neiss, an economist at PGIM Fixed Income, an asset manager.

The pivot at the Fed to cut rates will have important ripple effects as it eases global financial conditions, Ms. Neiss added. If the Fed makes an outsize cut on Wednesday, it could also “open up the space for European policymakers, including the U.K., that they could then cut more aggressively as well,” she said. That would most likely happen next year once the remnants of the energy price shock disperse and policymakers have a clearer sense of what price pressures are left.

But there are outliers around the rest of the world. Many countries took an aggressive response to the inflation shock after the pandemic, while the Bank of Japan maintained its ultra-easy monetary policy, hoping to engineer the kind of steady long-term inflation the Japanese economy needed. But as rising prices stung Japanese households and did not help businesses as expected, the central bank broke with its posture, raising rates in July for only the second time in nearly two decades.

In emerging markets, central banks are moving in different directions. Brazil’s central bank is expected to raise rates on Thursday for the first time in two years. Brazilian officials began their easing cycle in August 2023 as inflation slowed toward their target. But now, they are expected to reverse course as economic growth picks up and brings with it fears of a resurgence in inflation. Central bankers in Mexico are expected to continue rate cuts, and the central bank in South Africa is expected to cut rates on Thursday for the first time since the pandemic.

The Fed then started lifting interest rates in March 2022, as inflation took off. By that summer, they were making a series of jumbo rate increases that would ultimately take borrowing costs to their current 5.33 percent, the highest in more than 20 years.

And yet, it is unclear whether those developments will significantly alter voters’ predominantly negative perceptions of the economy ahead of the presidential election.

Recent weeks have brought a run of good data on consumer prices and interest rates for the administration. The price of gasoline has fallen below $3 a gallon in much of the South and Midwest and is nearing a three-year low nationally. Spiking grocery prices have slowed to a crawl. Mortgage rates are down more than a percentage point from their recent peak. The Census Bureau reported last week that the typical household income rose faster than prices last year for the first time since the pandemic. The overall inflation rate has returned to near historically normal levels, and the Fed is poised to begin cutting interest rates from a two-decade high.

The Biden administration, which has taken heat from Republicans and many economists for fueling inflation with its economic policies, has begun to celebrate those developments in bold terms. Officials are claiming vindication for their multi-trillion-dollar efforts to boost households and businesses in their recovery from the pandemic recession.

Mr. Biden’s Council of Economic Advisers published a blog post on Tuesday highlighting economic and job growth under Mr. Biden that has surpassed projections. Lael Brainard, who heads Mr. Biden’s National Economic Council, told the Council on Foreign Relations in New York on Monday that the American economy has now reached a “turning point.”

“A few years ago, many were convinced that the combination of a large decline in inflation with a sustained expansion that we are seeing today couldn’t happen,” she said.

Aides to the president have been pointing toward this inflection point for more than a year. They were confident that Fed cuts would help push down mortgage rates and send voters a powerful message that the worst of the inflation fight was over.

And yet, administration officials concede those gains have come months later than they had hoped and possibly too close to the election to dislodge long-hardened voter concerns over inflation under the Biden-Harris administration.

They also acknowledge that the rise in prices on Mr. Biden’s watch, including on necessities like food and housing, continues to burden families. The Council of Economic Advisers noted in a separate post last week that housing price increases continue to play an outsized role in overall inflation — a challenge unlikely to be solved quickly, and which is likely to necessitate new policy measures to encourage home building.

As a result, there is little consensus about how much the recent economic news might buoy some voters as they cast ballots in November’s presidential race. Former President Donald J. Trump has relentlessly attacked the Biden administration, including Ms. Harris, for soaring prices.

Economists disagree on the impact of the rate cut, now that it appears to finally be arriving.

Josh Bivens, the chief economist at the liberal Economic Policy Institute in Washington, said he would guess “it’s a very, very small slice of people who would recognize this kind of symbolic importance of the cut” for the economy and the administration’s stewardship of it.

It is possible, he added, that the Fed waited so long to cut rates that it has “denied the Harris campaign this advantage for a long enough time that its force now is almost totally eroded.”

R. Glenn Hubbard, a Columbia University economist who led the Council of Economic Advisers under President George W. Bush and has advised Republican presidential candidates, said a quarter-point cut might not cause a ripple in American politics.

But a larger rate cut, of half a percentage point, could signal reason to worry for consumers, he said.

In what could be a potential argument from Mr. Trump and other Republicans, Mr. Hubbard said that a decision to cut rates by half a percentage point “could be argued to represent a significantly weakening economy with potential political ramifications.”

Others say the cuts could have real benefits for Americans’ lives, and that they could set off a run of positive media coverage about the era of high inflation coming to an end, both of which could benefit Ms. Harris.

“For the millions of Americans who can’t pay cash for a house or a car, or who can’t always pay off their credit card bill in full, cuts will provide real relief,” said Lindsay Owens, executive director of the liberal Groundwork Collaborative in Washington. “I absolutely expect this to translate into a boost in consumer sentiment, and upticks in sentiment will benefit Harris.”

Consumer expectations for the economy improved in August, according to the University of Michigan, and have risen more than 10 percent from last year. But sentiment overall remains low by historical terms and is down from the start of Mr. Biden’s term.

Polls typically show Mr. Trump leading Ms. Harris on economic issues, though the gap has closed since she replaced Mr. Biden as the Democratic nominee. Neither the Harris nor Trump campaigns would comment this week on a potential Fed move and its implications for the economy. But a Republican National Committee spokeswoman, Anna Kelly, criticized Ms. Harris for her administration’s record on borrowing costs.

“Kamalanomics has led to the fastest increase in mortgage rates since 1981, and only President Trump can restore economic growth after four years of failure,” she said.

Percentage change in S&P 500 this year

The Nasdaq Composite index, which is chock-full of tech stocks deemed to be among the most sensitive companies to rate changes, has climbed over 5 percent since early September and sits about 5 percent below its July peak. The Russell 2000 index of smaller companies has also moved more than 5 percent higher over the same period, leaving it less than 3 percent away from its July record.

The gains have come with traders in futures markets indicating that they think a half-point cut — even if an unusually big move — is the most likely outcome on Wednesday. That’s a big shift in thinking from just a few weeks ago.

Lower rates (all else being equal) would be supportive to the stock market, easing borrowing costs for companies and increasing the value of investors’ holdings.

But it also matters why rates are being cut. If the Fed is cutting rates aggressively because policymakers are worried about the economy, stock prices are likely to slide. Right now, the hope among investors seems to be that the Fed will act fast so it can stay ahead of any potential economic weakness.

“I think investors are hopeful they get the best of both worlds,” said Alan McKnight, chief investment officer at Regions Bank.

There are some signs of caution among investors. The gains in recent weeks have been led by real estate and utilities, with the former seen as a primary beneficiary of lower rates and the latter a more defensive bet as the economy slows. The technology stocks that led the market rally for so many years have slipped over the past month.

Still, this move should eventually bring interest rates down for many borrowers, even as it is likely to lower the rates that financial institutions pay out to savers.

Here’s what to watch for in five key areas of your financial life, as rates fall now — and hopefully (for borrowers at least) even more in the coming months.

Auto Rates

What’s happening now: Auto rates and car prices have been trending lower but they still remain elevated, making affordability a challenge. But dealerships are offering more incentives and discounts to attract buyers, and that’s expected to continue.

Car loans tend to track with the yield on the five-year Treasury note, which is influenced by the Fed’s key rate. But other factors determine how much borrowers actually pay, including: your credit history, the type of vehicle, the loan term and the down payment. Lenders also take into consideration the levels of delinquent auto loans. As those move higher, so do rates, which makes qualifying for a loan more difficult, particularly for those with lower credit scores.

“As delinquencies drop not only would auto loans rate come down, but more people would have access to credit,” said Erin Keating, executive analyst at Cox Automotive.

The average rate on new car loans was 7.1 percent in August, according to Edmunds, a car shopping website, down slightly from 7.4 percent in the same month in 2023 and up from 5.7 percent in 2022. Rates for used cars were higher: The average loan carried an 11.3 percent rate in August, marginally higher than 11.2 percent last August and 9 percent in August 2022.

Where and how to shop: Once you establish your budget, get preapproved for a car loan through a credit union or bank (Capital One and Ally are two of the largest auto lenders) so you have a point of reference to compare financing available through the dealership, if you decide to go that route. Always negotiate on the price of the car (including all fees), not the monthly payments, which can obscure the loan terms and what you’ll be paying in total over the life of the loan.

Credit Cards

What’s happening now: The interest rates you pay on any balances that you carry should fall after the Fed has acted, though it may not be instant and it will vary by card issuer. As of May, the average interest rate when banks were assessing interest on balances was 22.76 percent, according to Federal Reserve data.

Much depends, however, on your credit score and the type of card. Rewards cards, for instance, often charge higher-than-average interest rates.

Where and how to shop: Earlier this year, the Consumer Financial Protection Bureau sent up a flare to let people know that the 25 biggest credit-card issuers had rates that were 8 to 10 percentage points higher than smaller banks or credit unions. For the average cardholder, that can add up to $400 to $500 more in interest each year.

Consider seeking out a smaller bank or credit union that might offer you a better deal. Many credit unions require you to work or live someplace particular to qualify for membership, but some bigger credit unions may have looser rules.

Before you make a move, call your current card issuer and ask them to match the best interest rate you’ve found in the marketplace that you’ve already qualified for. And if you do transfer your balance, keep a close eye on fees, whether your initial interest rate expires and if so, what it might jump to.

Mortgages

What’s happening now: Mortgage rates have fallen to their lowest level since February 2023, but more palatable rates aren’t going to solve the affordability problem. Housing prices remain high, in large part because there simply aren’t enough homes to meet demand.

Rates on 30-year fixed-rate mortgages don’t move in tandem with the Fed’s benchmark, but instead generally track with the yield on 10-year Treasury bonds, which are influenced by a variety of factors, including expectations about inflation, the Fed’s actions and how investors react.

The average rate on 30-year fixed-rate mortgages was 6.2 percent as of Thursday, down from 6.35 percent the previous week and 7.18 percent this time last year. Rates are also more than a percentage point lower than their most recent peak of 7.22 percent in early May.

Other home loans are more closely tethered to the central bank’s decisions. Home-equity lines of credit and adjustable-rate mortgages — which carry variable interest rates — generally rise within two billing cycles after a change in the Fed’s rates.

Where and how to shop: Prospective home buyers would be wise to get several mortgage rate quotes — on the same day, since rates fluctuate — from a selection of mortgage brokers, banks and credit unions.

That should include: the rate you’ll pay; any discount points, which are optional fees buyers can pay to “buy down” their interest rate; and other items like lender-related fees. Look to the “annual percentage rate,” which usually includes these items, to get an apples-to-apples comparison of your total costs across different loans. Just be sure to ask what’s included in the A.P.R.

Savings Accounts and C.D.s

What’s happening now: The rate reversal is likely to be most disappointing for savers, who have benefited from juicier yields on everything from online savings accounts and certificates of deposit to money market funds. Those are all likely to inch lower, in line with the Fed’s move, but some providers may move faster than others. That usually depends on whether the bank wants to attract new customers by dangling yields that are more attractive than their competitors’ offerings.

But you can safely assume that online high-yield savings account will still offer more competitive rates than traditional commercial banks, whose yields have remained anemic throughout this period of higher interest rates (averaging 0.45 percent as of September, according to DepositAccounts.com, part of the online loan marketplace LendingTree).

Where and how to shop: Rates are one consideration, but you’ll also want to look at providers’ history, minimum deposit requirements and any fees (high-yield savings accounts don’t usually charge fees, but other products, like money market funds, do). DepositAccounts.com, which tracks rates across thousands of institutions, is a good place to start comparing providers.

If you’re considering certificates of deposit, now is probably the time to lock in a decent rate if you haven’t already. Online C.D.s with a one-year term averaged 4.97 percent in August, according to DepositAccounts.com. Online savings accounts averaged 4.40 percent in August, down from 5.1 percent the same month last year.

Check out our colleague Jeff Sommer’s recent columns for more insight into money-market funds. The yield on the Crane 100 Money Fund Index, which tracks the largest money-market funds, was 5.06 percent as of Monday, down from 5.13 percent on July 29.

Student Loans

What’s happening now: There are two main types of student loans. Most people turn to federal loans first. Their interest rates are fixed for the life of the loan, they’re far easier for teenagers to get and their repayment terms are more generous.

Current rates are 6.53 percent for undergraduates, 8.03 percent for unsubsidized graduate student loans and 9.08 percent for the PLUS loans that both parents and graduate students use. Rates reset on July 1 each year and follow a formula based on the 10-year Treasury bond auction in May.

Private student loans are a bit of a wild card. Undergraduates often need a co-signer, rates can be fixed or variable and much depends on your credit score.

Where and how to shop: Many banks and credit unions want nothing to do with student loans, so you’ll want to shop around extensively, including with lenders that specialize in private student loans.

You’ll often see online ads and websites offering interest rates from each lender that can range by 15 percentage points or so. As a result, you’ll need to give up a fair bit of information before getting an actual price quote.

Here’s what to expect for corporate America when the Fed lowers rates:

For markets, it’s all about ‘why.’

All else equal, lower rates are good for the stock market. When investors gauge the value of a stock, they tend to come up with a higher figure when interest rates fall because of a common valuation principle known as discounting, in which a company’s future cash flows and costs become more attractive under low-rate conditions.

Fed officials are expected to cut rates by a quarter or a half a percentage point at this week’s meeting. In practice, according to analysts, the reason rates are being lowered matters more than the precise timing or magnitude.

If the economy is faltering, forcing the Fed to lower rates quickly, that can be a headwind to the stock market. A gentle return to a more normal level of rates — at least in the context of the past few decades — is less likely to crimp corporate profits in the way that an economic downturn could.

“It’s less about when they cut and how quickly, and more about why they cut,” said Greg Boutle, head of U.S. equity and derivatives strategy at BNP Paribas.

Some history: The Fed began lowering rates in September 2007, in the early stages of a financial crisis. Over the next 12 months, the S&P 500 fell more than 20 percent. But cuts to rates in 1995 and 1998 came alongside a strong rally for stocks.

For the time being, the consensus among economists appears to be that the economy will remain resilient, underpinning lofty stock valuations. But there is plenty of uncertainty over global growth, geopolitics and the coming presidential election weighing on investors.

Bank on mixed news for lenders.

There are few businesses more sensitive to interest rates than banks. That’s because lenders generally make money off the difference between what they pay depositors and what they charge to borrowers, such as home buyers in need of mortgages and trading firms who want leverage to supercharge their bets.

That difference is known as a spread, and higher rates allow banks to collect a larger spread. No wonder, then, that the biggest bank stocks dropped last week when executives from major institutions such as JPMorgan Chase warned that analysts were being too optimistic about how lenders would fare if rates drop and spreads shrink.

On the flip side, large investment banks like Goldman Sachs and Morgan Stanley as well as some corporate law firms have been hankering for the fees they can collect for advising on mergers and acquisitions, when one company buys another. Lower rates make it cheaper for those companies — or the private equity firms that back them — to take out loans to support those purchases and increase the likelihood of deals coming together.

Remember, though, that while mergers can pay off for investors and corporate executives whose contracts include deal-based payouts, rank-and-file employees could see their jobs disappear as part of “synergies” or cost-cutting efforts needed to pay back the loans that made the deals possible.

Commercial landlords will take all the help they can get.

While the Fed’s benchmark rate does not directly affect residential or commercial real estate mortgage rates — it can take months for lower interest rates to trickle down — landlords rely heavily on debt and will welcome any relief in the form of refinancing.

It will take far more than a drop in rates, however, to save the flailing office market. Many of the most distressed (i.e., empty) commercial buildings are in relatively unpopular downtown areas, and as many employees continue working remotely, it’s unclear if these spaces will ever be financially viable again.

And if lower rates allow more commercial properties to change hands at lower prices, that could force big landlords to lower the value of comparable properties in their portfolios. Many landlords and investors have been resisting this, arguing that the lack of recent comparable transactions makes the exercise futile.

An uptick in activity spurred by lower rates could prompt a cascade of falling building valuations.

Cue a business borrowing binge.

If companies can borrow more cheaply, the savings should mean they can spend more on hiring, for acquisitions, or to reward their shareholders with stock buybacks and dividends. That spending is one way lower rates would flow through the global economy.

But if lower rates are accompanied by rising macroeconomic worries, lenders could be hesitant about extending credit to indebted, struggling companies. In that case, the interest rates on offer might not change all that much.

For now, those worries remain on the back burner, and the prospect of lower rates has already revitalized appetite for lending from bond investors trying to lock in higher rates — and higher returns — before the Fed begins to cut. That has been welcomed by corporate America, especially by companies whose bonds are due in the near future or borrowers with weaker credit ratings.

Riskier, “high-yield” bond sales are coming in at a faster clip than they have in the past couple of years, with nearly $200 billion of borrowing in 2024 so far, according to the data provider Refinitiv. Pitchbook, another data provider, also noted a flurry of borrowing in August and September across bond and loan markets.

Everyone tries to predict the economy, but no one can.

Let’s be clear: The fact that the Fed is likely to cut interest rates is good news overall, in that it is the clearest sign yet that inflation is coming under control.

Price increases have been slowing for years. Overall Consumer Price Index inflation stood at 2.5 percent in the year through August, down from a peak of 9.1 percent in the summer of 2022.

As inflation approaches a normal pace, it has allowed the Fed to focus more intently on its other goal: maintaining a strong job market. By lowering interest rates gradually, the Fed is hoping to cool inflation without grinding the job market to a halt.

So far, consumer spending is holding up and hiring is continuing, albeit at a slower pace than in 2022 and 2023. But the unemployment rate has been creeping up over the past year, a warning that the Fed could overdo its efforts to cool the economy.

Christopher Waller, a Fed governor, acknowledged in a recent speech that figuring out the perfect speed to cut interest rates in order to nail the so-called soft landing could be a challenge.

A slower pace of cuts would come at “the risk of moving too slowly and putting the labor market at risk,” he said. But, he added, “cutting the policy rate at a faster pace means a greater likelihood of achieving a soft landing but at the risk of overshooting on rate cuts.”