Fed poised to cut rates for the first time since 2020, but by how much?

One choice is a more typical quarter-point cut that would be likely to tee up a slower, measured series of reductions. Or officials could dole out a more substantial half-point, showing a proactive eagerness to take pressure off the economy — and fast. Markets are increasingly betting on a larger cut.

The announcement is set to come at 2 p.m. Eastern time, at the end of the Fed’s two-day policy meeting. Officials will also release a fresh set of economic projections for inflation, jobs, overall growth and interest rates through the end of 2024 and beyond.

Then, at 2:30 p.m., Fed Chair Jerome H. Powell will appear at what will be a closely watched news conference. He’ll be pressed for a diagnosis of the job market, and on whether he thinks Fed policy is responsible for the recent pullback in hiring. Powell will also probably get questions on how much Fed officials expect to lower rates in the coming years to get to a more “neutral” setting, where policy isn’t stifling the economy or pumping it up.

Officials at the central bank have shifted their attention from high inflation to a slowing job market, mindful that they have fallen behind the curve before. In 2021, Fed leaders thought rising inflation would be a temporary blip of the covid economy — only to be proved wrong, which led them to rush to hoist interest rates at the fastest pace in decades. Now, the fear is that people could quickly lose their jobs and the unemployment rate could climb further if the Fed delays much more.

“We do not seek or welcome further cooling in labor market conditions,” Powell said in his most important speech of the year at the Jackson Hole Economic Symposium last month.

This week’s decision comes at an especially consequential time ahead of the presidential election. The Fed closely guards its independence from politics, and officials go to great lengths to stick to their mandate of stable prices and full employment. But a rate cut of any size would give some juice to the economy as Vice President Kamala Harris and former president Donald Trump are pitching their economic visions to voters. The Fed is also widely expected to cut rates again at its next meeting, in November — the week of the election.

The Fed’s deliberate, at-times sluggish approach has had economists expecting a quarter-point cut. But in the past few days, financial markets have leaned more toward a half-point move, especially after August inflation data showed continued progress toward the Fed’s 2 percent target. (According to the Fed’s preferred inflation gauge, prices were up 2.5 percent in July.)

Momentum on inflation meant that for much of the year, officials have talked about a balance of risks: If they cut rates too soon, they run the risk of inflation creeping back up. Or if they wait for total assurance that inflation is cruising to normal levels, they could unnecessarily hurt the job market.

A recent string of data made those hypothetical scenarios more real. July jobs numbers came in way below expectations, and while August’s figures were more in line with expectations, the unemployment rate remains above 4 percent. Big revisions to government data also showed hiring was much slower than previously understood in 2023 and early 2024. That all has prompted Fed officials to change their tune.

“In light of the considerable and ongoing progress toward the [Fed’s] 2 percent inflation goal, I believe that the balance of risks has shifted toward the employment side of our dual mandate, and that monetary policy needs to adjust accordingly,” Fed governor Christopher Waller said in a speech earlier this month.

Even though the Fed ultimately is deciding between two options, it’s rare for officials to go into a meeting unsure of what they’re going to do. Some market analysts speculate that simply because a half-point move is still on the table, that suggests officials will come out strong. But it remains to be seen if that reading of the tea leaves holds up.

Some in Washington are calling for the Fed to go even further. On Monday, three Democratic senators — Elizabeth Warren (Mass.), Sheldon Whitehouse (R.I.) and John Hickenlooper (Colo.) — called for a three-quarter-point cut, arguing Powell’s “delays have threatened the economy and left the Fed behind the curve.” While Warren and others started urging for cuts long before Fed officials were ready, such a big move is incredibly rare outside emergency situations.

Preston Mui, a senior economist at Employ America, a left-leaning think tank, supports a half-point move. He said a smaller trim probably wouldn’t amount to a major policy error but would be out of step with the Fed’s own messaging around protecting the labor market. If Fed officials opt for a quarter-point, “it’s possible they catch up.”

“I think what’s going to happen is they are going to have to try as much as they can to reinforce what Powell said in the Jackson Hole speech: They don’t want to see the labor market fall further from here,” he said.