The big question going into the Federal Reserve's meeting Wednesday comes down to how strongly officials signal their desire to cut rates.
The central bank is widely expected to hold its benchmark short-term interest rate steady -- in a range between 5.25% and 5.5%, a two-decade high -- while setting the table to begin a series of reductions at the next meeting in mid-September.
The Fed releases its policy statement at 2 p.m. Eastern time on Wednesday. Fed Chair Jerome Powell speaks at a news conference at 2:30 p.m. Here's a look at the four most important questions ahead of the decision:
Where do officials set the bar for a September interest-rate cut?
Officials are expected to revise their postmeeting statement in ways that hint that a rate cut in September is more likely than not. The policy statement is heavily debated by the 12 voting members of the Fed's rate-setting committee.
Seemingly trivial wordsmithing changes will be meaningful in framing the outlook for a September cut, including:
-- The first paragraph of the statement, which describes recent inflation and labor-market developments. -- The second paragraph, which describes the balance of risks between bringing inflation back to the Fed's 2% goal and maintaining a strong labor market. -- The third paragraph, which includes key language known as forward guidance that spells out what officials are looking for before they cut rates.
Language that acknowledges recent improvement in inflation and a more equal balance of risks, together with any changes to the forward guidance, will set the stage for Powell's press conference. There, he can elaborate on how officials are approaching the question of rate cuts.
Some analysts think Powell will open the door wider to a September cut without explicitly committing to any course of action. "If the inflation news is OK between now and September, then they can say, OK, now we're confident that we're on track, and we're going to start cutting rates," said William English, a former senior Fed adviser.
Why are officials moving closer to cutting rates?
Earlier this year, Fed officials were looking at cutting rates on the basis of better inflation news. Surprisingly strong readings in February and March torpedoed those plans.
But more recently, inflation has come in lower than expected. In addition, signs that the economy might be slowing more than anticipated, particularly amid a frozen housing market and weakness among low-income consumers, could make officials more comfortable that higher rates are having their intended effects on economic activity and inflation.
"The Fed knows the medicine it's administering is the right one -- some weaker parts of the economy are slowing down, even though there is still strength in other parts," said Raghuram Rajan, a former governor of India's central bank.
"There will be a temptation to say, 'Well, if we really want a soft landing, we should start cutting now because we have been in restrictive mode for some time,' and even after the Fed cuts, policy may remain restrictive," said Rajan.
Why not cut rates now?
Several former Fed officials and private-sector economists have said that all of the arguments justifying a cut in September -- better news on inflation and signs of slower spending and hiring that are raising the risk of unnecessary weakness -- are equally applicable now and that the central bank should cut rates Wednesday.
Still, top Fed officials have signaled they aren't yet fully confident that inflation is on a durable trajectory to their 2% target. After the Fed's June meeting, Powell said the first cut will be a "consequential decision" that "you want to get right."
Putting aside the merits of a July cut, most Fed officials have signaled a rate cut isn't warranted yet. As a result, a rate reduction on Wednesday "looks panicky, and I think it's likely to be unhelpful," said English, a professor at Yale School of Management.
What happens after the first cut?
Powell isn't likely to get that far ahead of things in his news conference, but these considerations could be an important part of officials' private deliberations this week because once policymakers cut interest rates the first time, they will face more questions over when they will cut again.
Since last year, Fed officials' quarterly economic projections have penciled in an interest-rate outlook suggesting that, once they make their first move, they could cut rates by a quarter percentage point roughly once every quarter.
Fed officials won't present new projections this week, but they will do so in September, which could allow them to show whether that is still a reasonable expectation. If the labor market weakens more between now and then, it is possible officials could move at consecutive meetings initially. The Fed meets again in November and December.
"If they have enough confidence to go in September, then that's got to make November live as well as December," said Richard Clarida, who was Fed vice chair from 2018 to 2022 and is now a senior adviser at Pimco.
The near-term outlook faces an awkward complication: November's two-day policy meeting begins the day after the Nov. 5 presidential election. While the Fed has made policy changes around elections in the past, officials try to maintain an apolitical approach to their decisions. That will put a premium on being clear, predictable and deliberate in their public communications.
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