WASHINGTON -- American consumers and home buyers, business people and political leaders have been waiting for months for what the Federal Reserve is poised to announce this week: That it's cutting its key interest rate from a two-decade peak.

It's likely to be the first in a series of rate cuts that should make borrowing more affordable now that the Fed has declared high inflation to be virtually defeated.

Take Kelly Mardis, proprietor of Marcel Painting in Tempe, Arizona, as an example. Approximately 25% of Mardis' clientele consists of real estate agents preparing homes for sale or new home buyers. He recalls a sharp decline in customer inquiries almost immediately after the Fed began increasing interest rates in March 2022, a trend that continued through July 2023.

As the housing market experienced a downturn, Mardis was forced to lay off roughly half of his 30-person workforce. This marked the most significant lull in business he had encountered in 14 years.

Following the Fed's initiation of rate reductions on Wednesday, Mardis anticipates a brighter economic outlook. Traditionally, a series of Fed rate cuts gradually leads to lower borrowing costs for various purposes, including mortgages, auto loans, credit cards, and business loans.

“I am absolutely convinced it will have a positive impact,” Mardis asserted. “I eagerly anticipate it.”

However, considerable uncertainty still surrounds this week's Federal Reserve meeting.

The Federal Reserve is poised to adjust its key interest rate, currently standing at 5.3%. The question remains: will they opt for a customary quarter-point reduction or an unusual half-point cut?

Will they continue to ease credit at their subsequent meetings in November and December and into 2025? Will reduced borrowing costs take effect in time to strengthen an economy that is still expanding at a healthy pace but is clearly showing signs of weakness?

Chair Jerome Powell emphasized in a speech last month in Jackson Hole , Wyoming, that the Fed is ready to lower rates to support the job market and achieve the challenging goal of a “soft landing.” This refers to the central bank successfully curbing inflation without triggering a severe recession and a spike in unemployment.

It's not entirely clear that the Fed can pull it off.

A positive sign is that, as Powell and other Fed officials have indicated that interest rate cuts are coming, many interest rates have already declined in anticipation. The average 30-year mortgage rate fell to 6.2% last week — the lowest level in about 18 months and down from a peak of nearly 7.8%, according to the mortgage giant Freddie Mac. Other rates, like the yield on the five-year Treasury note, which influences auto loan rates, have also decreased.

“This truly helps to reduce borrowing costs across the board,” said Kathy Bostjancic, chief economist at Nationwide Financial. “That provides substantial relief for consumers.”

Businesses can now access cheaper loans than they have in the past year, potentially leading to an increase in their investment spending.

“The real question is whether this will be enough, fast enough ... to achieve the gradual economic slowdown everyone is hoping for,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities.

Many economists believe the Fed should have cut rates at their last meeting in July, and are urging a significant rate reduction this week. Recent market indicators suggest investors anticipate the Fed will enact at least two sizable rate cuts before the year ends.

However, Goldberg warned that a sudden, large rate cut could backfire. It might convince markets that the Fed is far more concerned about the economy than they actually are.

“Investors could misinterpret this as a sign of serious economic trouble and cause widespread panic,” Goldberg cautioned.

It could also raise expectations for future reductions in interest rates that the Fed might not be able to meet.

In the long term, more crucial than Wednesday's Fed action is the pace of rate reductions throughout next year and the ultimate target. If Fed officials conclude that inflation has essentially been controlled and they no longer need to curb economic growth, this suggests that their key rate should be at a more “neutral” level, potentially as low as 3%. This would necessitate a series of further interest rate cuts.

Many economic experts believe the economy needs significantly lower interest rates. Diane Swonk, KPMG's chief economist, points out that hiring has averaged only 116,000 per month over the last three months, a rate equivalent to the sluggish job growth following the 2008-2009 Great Recession. The unemployment rate has increased by nearly a full percentage point to 4.2%.

“There's a precarious situation when job creation isn't robust,” Swonk said. “This labor market is still much weaker than we anticipated.”

However, Fed interest rate reductions could provide vital support to the economy when it needs it most.

Michele Raneri, director of U.S. research at TransUnion, a credit monitoring company, pointed out that lower interest rates typically encourage consumers to refinance high-interest debt — primarily credit card debt — into lower-cost personal loans. This would alleviate their financial pressures.

Once mortgage rates drop below 6%, Raneri said, more homeowners will likely be willing to sell, rather than holding onto their homes because of reluctance to trade a low mortgage rate for a significantly higher one. Increased home sales would help alleviate the supply shortage that has made it difficult for young people to purchase their first home.

“This will help to reduce the current shortage of homes available for sale,” Raneri said. “We need more people to sell their homes to create a more balanced market.”

Other small businesses are observing signs of a resurgence in activity. Brittany Hart, owner of a software consulting firm in Phoenix that caters to mortgage brokers, wealth managers, and banks, is noticing an uptick in inquiries from potential clients interested in adopting new software to enhance efficiency. This interest stems from their anticipation of a rebound in the housing market.

Hart has initiated a search for three new employees to assist in managing the anticipated increase in business, adding to the approximately 20 employees she currently has.

“This marks the first leading indicator that we are observing a return to normal activity within the housing market," she commented.