The Fed is expected to cut interest rates for the first time in four years

WASHINGTON (AP) — With inflation all but under control, the Federal Reserve is set to take action Wednesday that it hasn't taken in more than four years: cutting interest rates, a move that should lower borrowing costs for consumers and businesses just weeks before the presidential election.

And yet an unusual atmosphere of uncertainty hangs over this week's meeting: It is unclear how big the Fed's rate cut will actually be. Wall Street traders and some economists believe it is increasingly likely that the central bank will announce a larger-than-usual cut of half a percentage point. Many analysts are more likely to expect a typical rate cut of a quarter of a percentage point.

With inflation barely above its target, Fed officials have shifted their focus to supporting a weakening labor market and achieving a rare “soft landing”, thereby curbing inflation without triggering a sharp recession. A half-percentage point rate cut would be a sign that the Fed is as committed to maintaining healthy economic growth as it is to fighting high inflation. This week's move is likely to be just the first in a series of Fed rate cuts that will continue through 2025.

High interest rates and increased prices for everything from groceries to gasoline to rent have stoked widespread public disillusionment with the economy and provided a line of attack for former President Donald Trump's campaign. Vice President Kamala Harris, in turn, has accused Trump of saying that Trump's announcement to impose tariffs on all imports would drive prices up much further for consumers.

Over time, the Fed's rate cuts should lower borrowing costs for mortgages, auto loans and credit cards, as well as for business loans. Corporate spending could rise, as could stock prices. Businesses and consumers could refinance loans into debt instruments with lower interest rates.

Chairman Jerome Powell made a widely acclaimed speech last month in Jackson Hole, Wyomingthat Fed officials are confident that inflation has been largely defeated. It has fallen from a peak of 9.1% in June 2022 to 2.5% last monthnot far above the Fed's 2% target. Central bank officials fought rising prices by raising their benchmark interest rate 11 times in 2022 and 2023 to a two-decade high of 5.3% to curb borrowing and spending, ultimately slowing the economy.

Wage growth has slowed since then, removing a potential source of inflationary pressure. And oil and gas prices are falling, a sign that inflation is likely to cool further in the coming months. Consumers are also push back against high prices, to force such companies like Target and McDonald's lure customers with special offers and discounts.

But after several years of strong employment growth, employers have slowed hiring and the unemployment rate has increased nearly a full percentage point from its half-century low in April 2023 to a still-low 4.2%. Once unemployment rises that high, it tends to keep rising. But Fed officials and many economists point out that the rise in unemployment reflects an increase in new workers seeking jobs — especially new immigrants and college graduates — rather than layoffs.

Nevertheless, Powell said in Jackson Hole: “We will do everything we can to support a strong labor market.” He added that any “further weakening” of the labor market would be “unwelcome.”

Some analysts say such a sweeping statement suggests Powell would favor a half-percentage-point rate cut. Other economists say a quarter-percentage-point cut is more likely.

The question is how quickly the Fed will cut interest rates until they are no longer acting as a brake or an accelerator for the economy. Where this so-called “neutral” level lies is unclear, but many analysts estimate it to be between 3 and 3.5 percent. Economists who favor a half-percentage point cut argue that the Fed's benchmark interest rate is much higher than necessary given declining inflation.

Others point out that the Fed typically only cuts its benchmark interest rate by half a percentage point or more in an emergency. The last time it made such a cut was in March 2020, when the pandemic was shutting down the economy. With consumers still spending and the economy likely to grow at a healthy pace in the third quarter, more cautious Fed officials may argue there is no rush to cut.

One hopeful sign is that many lending rates have already fallen in advance of the upcoming rate cuts after Powell and other Fed officials signaled that rate cuts were imminent. The average mortgage rate for a 30-year term, for example, fell to 6.2% last week — the lowest level in about 18 months and down from a peak of nearly 7.8 percent, according to mortgage giant Freddie Mac. Other interest rates, such as the yield on five-year U.S. Treasury notes, which influences auto loan rates, have also fallen.