Are lower interest rates coming this summer? Wednesday’s Federal Open Market Committee outcome could go a long way toward answering that question.

Inflation is proving more stubborn than officials at the Federal Reserve had once hoped, and this week's meeting of the Fed’s policy committee will show how much the latest round of data has altered the central bank’s plans to cut its benchmark interest rate this year.

At stake at this week's two-day meeting is whether, and how much, the Fed will lower the fed funds rate. That rate influences interest on mortgages, credit cards, auto loans, and other kinds of loans, all of which now have borrowing costs close to multi-decade highs. 

While the Fed could in theory move the interest rate, they’re widely expected to hold it steady. Fed officials have said they are waiting for “greater confidence” that inflation is firmly on its way back down to the central bank’s goal of a 2% annual rate before they lower the rate. Inflation was running at 3.2% over the year in February, down from its recent peak of 9.1% in June 2022 as measured by the Consumer Price Index.

The bigger question is whether they expect to cut rates at the same pace as they did the last time they made predictions.

Back in December, Fed officials, encouraged by cooling inflation, had projected that they would lower the rate by 0.75 percentage points from its current range of 5.25% to 5.50% in 2024. But that outlook has been thrown into doubt by higher-than-expected consumer price increases in January and February, which have raised the possibility that inflation’s downward trajectory has stalled.

Policymakers on the Fed committee were under a communications blackout when February’s discouraging news on the inflation front came out, so this week's meeting will provide the first clues about how it’s changed their thinking, or whether they will write it off as a bump in the road.

What Will the Dot Plot Tell Us?

The “dot plot” will be released by the Fed with their decision on Wednesday, showing how FOMC members view the economic outlook and how high officials think the fed funds rate will be for the next few years. These projections are released quarterly.

Some experts think the Fed will continue to forecast three 0.25 percentage point rate cuts later this year, thinking the slower rent increases over the last year are bound to push down inflation measures in the coming months.

However, many economists noted a good chance that officials will pare back their expectations to only two rate cuts.

“We expect little change to the FOMC statement and the projections, with the median dot remaining at three cuts,” Ellen Zentner, chief economist at Morgan Stanley, wrote in a commentary. “Key risk: it would take just two participants to change from three cuts to two for the median dot to move to a total of two cuts in 2024, underscoring that the risk tilts toward fewer rather than greater.”

Markets are pricing in three quarter-point rate cuts this year, with a 63% chance they will begin in June, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data. That’s a far cry from the beginning of the year, when markets had been expecting twice as many rate cuts starting in March.

Update-March 19, 2024: This article has been updated with additional comments from economists and newer expectation data.