The Federal Reserve's most significant interest rate decision in years will be announced on Wednesday. Here's what to anticipate.

• The Federal Open Market Committee of the central bank is shrouded in an unusual sense of enigma during this week's meeting.
• The Federal Reserve is uncertain about whether to reduce interest rates by 25, 50, or a traditional quarter-percentage-point.
• This Fed meeting will be packed with action, including updates on projections for future rate cuts and economic estimate adjustments.

Federal Reserve meetings are typically predictable, with policymakers signaling their intentions beforehand and markets reacting accordingly. As a result, everyone generally has a good idea of what to expect.

Not this time.

The Federal Open Market Committee's meeting this week is shrouded in mystery, as markets are certain the Fed will lower interest rates but there is intense debate about the extent of the policy move.

Will the Fed reduce interest rates by 25 basis points or take an aggressive first step and reduce them by 50 basis points?

The FOMC meeting, which concludes on Wednesday afternoon, may be more significant than usual due to uncertainty among fed watchers. The release of the Fed's rate decision will occur at 2 p.m. ET.

"Mark Zandi, the chief economist at Moody's Analytics, stated that he hopes the Federal Reserve will cut 50 basis points, but he believes they will cut 25. His hope is for a 50-basis-point reduction because he thinks interest rates are too high. Zandi explained that the Fed has achieved its mandate for full employment and inflation back at target, which is not consistent with a five and a half percent-ish funds rate target. Therefore, he believes the Fed needs to normalize rates quickly and has a lot of room to do so."

The volatility of pricing in the derivatives market is influenced by the actions of the Fed.

Traders had anticipated a 25-basis-point cut until Friday, when sentiment shifted and a half point was added to the table. As of Wednesday afternoon, fed funds futures traders were only 63% convinced of a bigger move, which is a lower level of conviction compared to previous meetings. One basis point equals 0.01%.

On Wall Street, it was predicted that the Fed's initial move would be more cautious.

"Tom Simons, a U.S. economist at Jefferies, stated that although tightening seemed to work, it didn't work exactly as expected, so easing should be viewed with the same uncertainty. Therefore, if you're uncertain, you shouldn't rush."

"Zandi advised moving quickly to avoid breaking something."

The FOMC meeting room is likely to host an intriguing debate, given the unusual split among officials who typically agree on decisions.

"According to former Dallas Fed President Robert Kaplan, who spoke to CNBC on Tuesday, his prediction is that they are divided. Some members of the group feel that they are behind schedule and want to take a more proactive approach, while others are more cautious and prefer to manage risks carefully."

This Fed meeting promises to be action-packed, with a breakdown of what's on tap beyond the 25 vs. 50 debate.

The rate wait

Since its last hike in July 2023, the FOMC has maintained its benchmark fed funds rate within the range of 5.25%-5.5%.

Despite the Fed's preferred inflation measure falling from 3.3% to 2.5% and the unemployment rate rising from 3.5% to 4.2% during that time, the stock market has reached its highest point in 23 years.

At the upcoming meeting, Chair Jerome Powell and his colleagues have made it clear that a rate cut is imminent. The decision on the magnitude of the cut will require a delicate balance between controlling inflation and taking into account the slowing labor market in recent months.

"The Fed must weigh the risk of reigniting inflation pressures by cutting by 50 bps or threatening a recession by cutting by just 25 bps, according to Seema Shah, chief global strategist at Principal Asset Management. As they have already been criticized for responding to the inflation crisis too slowly, the Fed will likely be cautious in their approach to the risk of recession."

The 'dot plot'

The signals sent by meeting participants about where they expect rates to go from here may be just as important as the rate cut itself.

The "dot plot" will provide the first glimpse into how officials see the future unfolding over the next several years, with the September plot offering a preview of 2027.

In June, FOMC members predicted only one rate cut until the end of the year. However, it is likely that this will increase, with markets anticipating up to five or 1.25 percentage points worth of cuts (assuming 25 basis point moves) in the remaining three meetings.

The CME Group's FedWatch gauge predicts that traders expect the Fed to reduce rates by 2.5 percentage points in the next year, ending at the current overnight borrowing rate.

Zandi stated that the market outlook seems too aggressive unless the economy experiences a significant weakening. Moody's anticipates making quarter-point cuts at each of the three remaining meetings this year, including this week's.

Economic projections

The FOMC's Summary of Economic Projections includes a dot plot, which presents unofficial forecasts for unemployment, GDP, and inflation.

The biggest adjustment for the SEP is likely to be due to unemployment, which the committee is expected to increase from the 4.0% forecast in June. The current jobless rate is 4.2%.

It is likely that the core inflation rate, which was forecasted at 2.8% for the entire year in June, will be revised downward, as it currently stands at 2.6% in July.

Goldman Sachs economists predict that inflation is likely to fall below the FOMC's June forecasts, and the initial high prints at the beginning of the year are becoming more indicative of seasonal fluctuations rather than a resurgence. As a result, the focus of the meeting will shift to assessing labor market risks.

The statement and the Powell presser

The committee's post-meeting statement will need to be updated to reflect the anticipated rate cut and any additional forward guidance.

The market will first respond to the statement and the SEP, which will be released at 2 p.m. ET, before reacting to the Powell press conference at 2:30.

The FOMC is predicted by Goldman to revise its statement, expressing greater confidence in inflation, describing the risks to inflation and employment as more balanced, and reiterating its dedication to preserving maximum employment.

"Simons, the Jefferies economist, stated that forward guidance at this stage in the cycle is ineffective because the Fed is uncertain about its future actions."