Inflation remains stubbornly above target, the economy is growing at a rate of around 3% and the labor market remains stable. All in all, it sounds like a perfect recipe for the Federal Reserve to raise interest rates, or at least maintain them.

However, that may not be the case when the Federal Open Market Committee, the central bank’s interest rate watchdog, announces its policy decision on Wednesday.

Instead, futures traders expect the FOMC to actually cut its benchmark federal funds rate by a quarter of a percentage point, or 25 basis points. This would drop to a target range of 4.25% to 4.5%.

Despite high market expectations, it could be a decision that receives unusually close scrutiny. A CNBC poll found that while 93% of respondents said they expected a cut, only 63% said it was the right thing to do.

“I would be inclined to say ‘no cut,'” former Kansas City Fed President Esther George said Tuesday during a CNBC interview with “Squawk Box.” “Let’s wait and see how the data arrives. 25 basis points doesn’t usually determine where we stand, but I think it’s time to signal to the markets and the public that they’re not paying attention.”

In fact, inflation remains a thorny issue for policymakers.

While the annual rate has fallen significantly from its 40-year peak in mid-2022, it remains in the 2.5% to 3% range for much of 2024. The Fed targets inflation at 2%.

The Commerce Department is expected to report Friday that the personal consumption expenditures price index, the Fed’s preferred measure of inflation, rose to 2.5% in November, or 2.9% for the core measure that excludes food and energy.

Justifying a rate cut in this environment requires skillful communication from Chairman Jerome Powell and the committee. Former Boston Fed President Eric Rosengren also recently told CNBC that he would not make any cuts at this meeting.

“They have been very clear about their goal and as we watch the inflation data coming in, we are noticing that inflation is no longer slowing as much as before,” George said. “That, I think, is a reason to be cautious and really think about how much of this policy easing is needed to keep the economy on track.”

Fed officials who have advocated for a cut say policy doesn’t need to be so restrictive in the current environment and they don’t want to risk hurting the labor market.

If the Fed goes through with the cut, it will mean that the federal funds rate has been cut by a full percentage point since September.

While that’s a significant amount of easing in a short period of time, Fed officials have tools they can use to make clear to markets that future cuts won’t come so easily.

One of these tools is the dot plot matrix of individual members’ interest rate expectations for the next few years. This will be updated on Wednesday along with the rest of the economic forecast summary, which will include informal forecasts for inflation, unemployment and gross domestic product.

Another tool is the use of guidelines in the post-meeting statement to indicate where the committee’s policy is heading. Finally, Powell can use his press conference to provide further clues.

It is the Powell negotiation with the media that markets will be watching most closely, followed by the dot plot. Powell recently said the Fed “can afford to be a little more cautious” about how quickly it will ease in the face of what he described as a “strong” economy.

“We will see them lean in the right direction and start to raise their inflation forecast,” said Vincent Reinhart, BNY chief economist and former director of the Fed’s monetary division, where he worked for 24 years. “The points (will) drift up a little bit and (there will be) a lot of preoccupation at the press conference with the idea of ​​skipping meetings. So it will turn out to be an aggressive cut in that regard.”

Powell will almost certainly be asked how politicians might position themselves on fiscal policy under President-elect Donald Trump.

So far, the chairman and his colleagues have brushed aside questions about the impact Trump’s initiatives could have on monetary policy, citing uncertainty about what is just talk now and what will become reality later. Some economists believe the new president’s plans for aggressive tariffs, tax cuts and mass deportations could exacerbate inflation even further.

“Obviously the Fed is in a bind,” Reinhart said. “We used to call it the trapeze artist’s problem. If you are a trapeze artist, do not leave your platform to swing out until you are sure your partner has swung out. For the central bank, that’s not really possible.” Change their forecast in response to what they think will happen in the political economy until they are fairly certain that there will be those changes in the political economy.

“A big concern at the press conference was the idea of ​​skipping meetings,” he added. “So I think it will be a restrictive easing in that regard. If (Trump’s) measures are actually implemented, the forecast could shift even further.”

Most Wall Street forecasters expect Fed officials to raise their inflation expectations and lower expectations for rate cuts in 2025.

When the dot chart was last updated in September, officials said there would be four quarter-point cuts next year. Markets have already lowered their own expectations for easing, with a likely path of two rate cuts in 2025 following this week’s move, according to CME Group’s FedWatch gauge.

The Fed is also expected to skip its January meeting. Wall Street expects little to no changes in the statement after the meeting.

Officials are also expected to raise their estimate for the “neutral” interest rate, which neither boosts nor restricts growth. That level has been around 2.5% for years – an inflation rate of 2% plus 0.5% at the “natural” level of interest rates – but has risen in recent months and could exceed 3% in this week’s update.

Finally, the Committee may adjust the interest rate it pays on its overnight repurchase agreements by 0.05 percentage points if the Federal Reserve interest rate drifts near the lower end of its target range. The “ON RPP” rate serves as a floor for the funds rate and is currently 4.55%, while the effective funds rate is 4.58%. Minutes from the November FOMC meeting showed that officials were considering a “technical adjustment” to the interest rate.