What’s next for interest rates? An era of “peak uncertainty”.

When Jerome H. Powell, Chairman of the Federal Reserve, speaks at his post-meeting news conference Wednesday, investors and many Americans will be keenly focused on one question: When will the Fed begin to reduce interest rates?

Policymakers sharply increased borrowing costs between March 2022 and July, to a 22-year high of 5.25% to 5.5%, in a bid to bring rapid inflation under control by cooling the economy. They have since paused, waiting to see how the economy would respond.

But with inflation moderating and the job market growing at a more modest pace, Wall Street is increasingly expecting that the Fed may soon begin cutting interest rates — perhaps even during the first three months of 2024.

Fed officials have been reluctant to say when that might happen, or even to promise that they would be done raising interest rates. Indeed, they still fear that the economy will not recover or that progress in controlling inflation will stop. Policymakers do not want to declare victory only to have to reverse their victory.

Mr. Powell will likely adopt a noncommittal tone this week given all the uncertainty, economists said. After their decision on Wednesday, Fed officials will release a new quarterly summary of economic projections showing where they think rates will be at the end of 2024, which will indicate how many rate cuts they plan to make, the optionally. But the projections will offer few clues about when exactly moves might occur.

And both the Fed’s and Wall Street’s forecasts could mask a harsh reality: There is a wide range of possible interest rate moves next year, depending on how the economy fares over the course of the year. of the next few months.

“We’re kind of at the highest level of uncertainty,” said Michael Gapen, chief U.S. economist at Bank of America.

This week itself should contain no surprises: The Fed should keep rates stable and its options open, Mr. Gapen said. But for next year, he and other economists said, there are three possible scenarios, each of which could require very different policy.

Interest rates are weighing on the housing market, discouraging consumers from making big purchases with borrowed money and making growing a business less attractive for months — and the effects could start to add up.

If the economy slows significantly in late 2023 and early 2024, that could lead the Fed to lower interest rates as soon as possible to avoid curbing growth so aggressively that the economy plunges into a recession.

If employers cut jobs in December, the Fed could lower interest rates as early as 2024, Mr. Gapen said. He said it would be an “easy” scenario for the Fed: it would be obvious that rates had to go down.

But that’s not what most economists expect.

Most forecasters think the economy is expected to continue growing at the end of this year and into next year, but more slowly than in recent quarters. This gradual cooling should help inflation continue to moderate.

In such a scenario, the key question for the Fed will be when to cut rates – and why. Would it make sense to reduce borrowing costs simply because inflation is falling, even if economic data holds up overall?

Fed officials, including John C. Williams, president of the Federal Reserve Bank of New York, and Christopher Waller, Fed governor, have suggested that it is possible. The logic is pretty simple: Interest rates aren’t adjusted for inflation, so as inflation falls, rates could start to weigh more heavily on the economy in adjusted terms.

“If we see continued disinflation” and “if we are convinced that inflation is really coming down,” Mr. Waller said at a conference on Nov. 28, “then you could start to lower the policy rate simply because inflation is lower.”

The question is when. Mr. Waller suggested it might take several months of steady progress for officials to feel comfortable.

This brings us to the last possibility. Economists have regularly been surprised by the persistence of economic data and price increases since 2021, and that could happen again.

If the economy and inflation prove stronger than expected, the solution would be simple. Officials are likely to raise rates further, as they have repeatedly indicated they are prepared to do.

But more complicated scenarios are possible. The economy could recover even if inflation slows, for example, creating the risk that strong demand will push up futures prices. “I think they would be more reluctant” to cut rates in that case, said Michael Feroli, chief U.S. economist at JP Morgan.

Or, progress on inflation could stall even if the economy slows, forcing the Fed to weigh the risk of a recession against sustainably high inflation.

The many possibilities help explain why the Fed’s Federal Open Market Committee is trying to keep its options open.

“Having come this far so quickly, the FOMC is moving cautiously,” Mr. Powell said in a Dec. 1 speech.