The Federal Reserve meets on Wednesday. Here’s what to watch.

Federal Reserve officials will wrap up their two-day meeting on Wednesday and are largely expected to keep interest rates steady at their highest level in two decades when they release their policy decision at 2 p.m. local time.

But investors will likely be watching the meeting closely — particularly Chairman Jerome H. Powell’s news conference at 2:30 p.m. — for clues as to when policymakers might start lowering interest rates. The Fed has kept its benchmark rate in a range of 5.25% to 5.5% since July, and officials forecast in December that they could cut borrowing costs by three-quarters of a percentage point during 2024. .

But the timing and extent of these rate cuts remains uncertain. On the one hand, inflation has fallen more quickly than many economists had expected in recent months. On the other hand, economic growth is proving stronger than expected, which could give companies the means to continue raising prices in the future.

Here’s what you need to know about this meeting.

Fed policy statement after meeting did you suggest that officials will monitor economic data “to determine the extent of any additional policy signatures that may be appropriate.” Now that further rate increases appear less and less likely, this language could be changed.

Fed officials don’t want to keep interest rates so high for so long that they squeeze the economy too much and tip it into a recession. On the other hand, they don’t want to cut rates too soon, which would allow the economy to accelerate and risk a further pick-up in inflation. Mr. Powell could explain how officials will try to achieve that balance.

Much of what comes next will depend on which numbers Mr. Powell and his colleagues decide to focus on — growth or inflation — and investors could get a sense of that this week. Both growth and consumer spending are faster than many economists expected. But the Fed’s preferred inflation gauge is also below 3% for the first time since early 2021, even after deducting food and fuel costs, which can fluctuate from month to month.

These mixed signals have made Wall Street less sure about what the Fed will do next. Most investors previously expected a rate cut at the Fed’s next meeting in March. But sentiment is now moving towards a rate cut in May. Mr. Powell’s remarks will have the potential to shift those expectations, either making an imminent rate cut more likely or pushing it further away from the table.

“This is a conversation about: When will they start lowering interest rates? Because they don’t want to squeeze too hard,” said Gennadiy Goldberg, chief U.S. rates strategist at TD Securities.

“We’re heading into the last non-live meeting,” he said, meaning that while no rate changes are expected in January, rate cuts could be on the table at any time. what a meeting afterwards.

Another point of interest to watch on Wednesday: When the Fed starts cutting rates, what will that likely look like? Rate reductions could come quickly and regularly, be large or small, and arrive earlier or later in the year.

Christopher Waller, governor of the Fed, has previously suggested that the central bank should be able to lower rates “methodically and cautiously,” rather than making the sharp rate cuts that have sometimes occurred in the past.

The Fed has reduced its bond balance sheet, after it grew sharply during the pandemic as the central bank bought securities to help calm markets and stimulate the economy.

The authorities reduced their holdings by letting their securities expire without reinvesting them. But policymakers will have to stop doing this at some point, because excessive reduction in bond holdings could cause chaos in the markets.

In fact, minutes of the Fed’s December meeting showed that officials thought “it would be appropriate for the Committee to begin discussing the technical factors that would guide a decision to slow the pace of the runoff well before such a decision is made in order to provide “appropriate notice to the public.” »

Will this discussion of nerdy details happen at this meeting? Economists will be on the lookout.