A Fed rate cut is coming. How big is anyone’s guess.

The Federal Reserve is poised to cut its key interest rate Wednesday, the first time since the onset of the Covid-19 pandemic that it has pushed it lower.

A reduction to the central bank’s federal funds rate serves as a benchmark for other borrowing costs throughout the economy. And while that move has been widely anticipated, investors have been unable to predict how large the cut will be.

On Tuesday, a survey by CNBC correspondent Steve Liesman showed a majority of respondents forecasting a 0.25% cut from the current 5.3% level, even as Wall Street traders said it was more likely that the central bank would issue a 0.5% cut.

The Fed tends to move in 0.25% increments — and until recently, there was general agreement that it was likely to lower the rate by that amount. But a series of data points showing worsening economic conditions has made some analysts believe a 0.5% cut is more likely — and perhaps even necessary.

While the unemployment rate, at 4.2%, remains relatively low by historical standards, it has climbed in four of the last five months — a pace that tends to occur before recessions. And while layoff activity remains subdued, hiring rates have ground to a halt, making life miserable for many people looking for a job.

In a recent research paper, economists at the Minneapolis Federal Reserve argued the U.S. labor market may be even worse off than it appears, noting that by one measure, every open position now has 1.5 job applicants — well below the pre-pandemic average.

“We do not seek or welcome further cooling in labor market conditions,” Fed Chair Jay Powell said in a speech last month.

Among those in favor of a 0.5% cut is Bill Dudley, the former president of the Federal Reserve Bank of New York and now a columnist for Bloomberg News.

“When the labor market deteriorates beyond a certain point, the process tends to be self-reinforcing,” Dudley warned Monday, adding that investors increasingly see signs of weakness that the Fed could be missing.

In a blog post the same day, Preston Mui, senior economist at Employ America, a research group that advocates for full employment, said a large “up front” cut would signal that the Fed wants to get ahead of labor market deterioration.

If, instead, the Fed opts for a 0.25% cut even as the central bank indicates it will do another 0.25% cut at its next meeting in November, it will signal to markets that it does not have the appetite for being proactive, Mui said.

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