On Wednesday at 2 p.m., the US Federal Reserve is expected to announce a rate cut for the first time in four years. Many economists see this moment as the end of an era and the beginning of the end of the central bank’s fight against inflation.

The Fed’s benchmark interest rate – used to set interest rates on everything from mortgages to auto loans – hit a 20-year high last year, making it more expensive to borrow money.

This rate cut is a big deal for the economy. But it will take some time for American consumers to feel the impact. Here’s what to expect.

Why is the Fed lowering interest rates?

When setting interest rates, the Fed takes two things into account: inflation and labor markets.

Balancing price increases and unemployment is what the Fed calls its “dual mandate”: to ensure that inflation does not get too high and that unemployment remains low.

After years of pandemic-related economic turmoil—waves of unemployment followed by massive federal stimulus measures and various supply chain problems—inflation began to rise rapidly in 2022, peaking at 9.1% in June 2022. The Fed raised interest rates 11 times over a period of about a year and a half, from March 2022 to July 2023, the last time.

Since then, inflation has fallen to 2.5%. While still above the Fed’s 2% target, it represents a significant decline from its peak.

The labor market remains strong but has begun to cool. Unemployment hit historic lows as prices rose, but this year the unemployment rate rose to 4% for the first time since January 2022. Employers also appeared to be adding fewer jobs to the economy each month, a rapid slowdown that has some fearing the country could be heading for a recession.

When both recent inflation and labor market data pointed to a slowdown, Fed officials signaled for the first time in late summer that it was time to cut interest rates.

“It is time to adjust policy. The direction is clear,” Powell said in a closely watched speech in August.

When will we feel the effects of the interest rate cuts?

Although the new interest rates will take effect immediately, it will take some time for noticeable effects to be felt across different parts of the economy.

The most immediate impact may have been felt even before the Fed actually cut rates. The highly reactive and volatile U.S. stock market hit record highs at the close of trading on Monday and Tuesday as investors prepared for the Fed’s rate cut.

“The adjustment for consumers is generally less immediate than, for example, market prices. In trading and securities, you can adjust the price immediately. Many (consumer) contracts run longer,” said Anastassia Fedyk, assistant professor of finance at the Haas School of Business at the University of California, Berkeley. “It takes a while for that to be reflected in the economy.”

Fedyk pointed out that although it has been over a year since the Fed last raised interest rates, the impact is still being felt. Inflation was 2.5 percent in August, compared to 3.7 percent in August 2023, a month after the Fed last raised interest rates.

The new interest rate “takes effect immediately, but it may take some time for it to be reflected in the economy. That’s why we continue to see a cooling of inflation numbers, even though the Fed has not raised rates for a long time,” Fedyk said.

Will mortgage rates fall?

Yes, but it will happen slowly. The good news for homebuyers is that the average interest rate has already started to fall in anticipation of the Fed’s rate cut this year. The average 30-year fixed-rate mortgage rate peaked at 7.79% in 2023 and has now fallen to below 6.5% – still double what it was in 2021, but a sign of easing nonetheless.

However, it will take some time before interest rates have a greater impact on the real estate market.

“It’s not going to have an impact on existing mortgages unless people refinance while there’s demand,” Fedyk said. Even though it will be cheaper for banks to lend money, “there will have to be a lot of market forces at work to pass these things on to the consumer.”

What about other types of loans?

Some loans become cheaper over time, but many depend on other factors, such as a person’s creditworthiness.

Auto loans closely follow the Fed’s interest rate path, but are also affected by the customer’s creditworthiness and the vehicle. Credit card debt, already among the more expensive loans, will also become slightly cheaper, although not by much.

Most student loans are not affected by interest rates because most of them come from the federal government, which sets its own student loan interest rates that are not tied to the Fed.

Will there be further interest rate cuts?

The Fed likes to take a slow and steady approach. It took the Fed 11 meetings to go from 0%, the interest rate at the start of the pandemic, to a high of 5.5%. If it wants to cut the benchmark interest rate again, the Fed is unlikely to cut the benchmark interest rate by more than half a percentage point per meeting.

But economists say this meeting marks the beginning of a new era of interest rate cuts by the Fed.

“This Fed tends to be pretty cautious and data-driven, and it’s unlikely this will be a one-off thing,” Fedyk said. “This will likely be the start of a gradual decline in rates within months, which of course means we’ll see further impacts going forward.”