A Fed rate cut is coming. How big is anyone’s guess.

The Federal Reserve is poised to cut its key interest rate Wednesday, the first time since the onset of the Covid-19 pandemic that it has pushed it lower. 

A reduction to the central bank’s federal funds rate serves as a benchmark for other borrowing costs throughout the economy. And while that move has been widely anticipated, investors have been unable to predict how large the cut will be.

On Tuesday, a survey by CNBC correspondent Steve Liesman showed a majority of respondents forecasting a 0.25% cut from the current 5.3% level, even as Wall Street traders said it was more likely that the central bank would issue a 0.5% cut.   

The Fed tends to move in 0.25% increments — and until recently, there was general agreement that it was likely to lower the rate by that amount. But a series of data points showing worsening economic conditions has made some analysts believe a 0.5% cut is more likely — and perhaps even necessary.

While the unemployment rate, at 4.2%, remains relatively low by historical standards, it has climbed in four of the last five months — a pace that tends to occur before recessions. And while layoff activity remains subdued, hiring rates have ground to a halt, making life miserable for many people looking for a job.

In a recent research paper, economists at the Minneapolis Federal Reserve argued the U.S. labor market may be even worse off than it appears, noting that by one measure, every open position now has 1.5 job applicants — well below the pre-pandemic average. 

“We do not seek or welcome further cooling in labor market conditions,” Fed Chair Jay Powell said in a speech last month.

Among those in favor of a 0.5% cut is Bill Dudley, the former president of the Federal Reserve Bank of New York and now a columnist for Bloomberg News. 

“When the labor market deteriorates beyond a certain point, the process tends to be self-reinforcing,” Dudley warned Monday, adding that investors increasingly see signs of weakness that the Fed could be missing.   

In a blog post the same day, Preston Mui, senior economist at Employ America, a research group that advocates for full employment, said a large “up front” cut would signal that the Fed wants to get ahead of labor market deterioration.

If, instead, the Fed opts for a 0.25% cut even as the central bank indicates it will do another 0.25% cut at its next meeting in November, it will signal to markets that it does not have the appetite for being proactive, Mui said. 

“If the Fed waits for layoffs to rise, they will probably be too late; fire prevention is more effective than fire fighting,” he wrote. 

The counterargument: Markets could interpret a 0.5% cut as a sign the Fed thinks the economy is in worse shape than even the more alarming recent data suggests.

“A (0.5%) cut is usually done in emergencies,” like the Covid-19 pandemic, said Mark Zandi, chief economist at Moody’s financial group. “Some could interpret that as the economy going off the rails.” 

Whatever the outcome, some consumers have already begun to benefit merely from the anticipation that the Fed will lower rates. Mortgage interest rates have hit their lowest level since February 2023, while auto loan rates are also falling.

A 0.5% cut would more directly affect rates tied to the fed funds rate, including credit cards, home equity lines of credit and small-business loans.

However, substantial relief in the short term from either a 0.25% or 0.5% cut is unlikely, according to Greg McBride, chief financial analyst at Bankrate. 

“By itself, one rate cut isn’t a panacea for borrowers grappling with high financing costs and has a minimal impact on the overall household budget,” McBride wrote in a note released Monday. “What will be more significant is the cumulative effect of a series of interest rate cuts over time.” 

Consumers should continue aggressively paying down high-cost credit card debt or home equity lines of credit carrying double-digit interest rates, he said. 

“Interest rates won’t fall fast enough to bail you out of a tight situation,” McBride wrote.