Investors are on edge this week as Federal Reserve officials prepare to signal how many interest rate cuts are still likely in 2024.

Most market watchers believe policymakers will dial their expectations back. The question is by how much.

The new projection on Wednesday will come in the form of a so-called dot plot, a chart updated quarterly that shows each Fed official's prediction about the direction of the federal funds rate.

In March, the dot plot revealed a consensus among Fed officials for three cuts. Now that projection is in question following a string of sticky inflation readings, cautious commentary from Fed officials, and a US labor market that added more jobs than expected in May.

Most investors now expect little more than just one cut for 2024.

"I think the policy path will change a bit," said former Kansas City Fed president Esther George, who predicts the median among 19 policymakers could drop to one cut, even as a healthy number of officials still argue for two.

"My expectation is the dots will show and confirm what I think the market has picked up, and that is fewer rate cuts with the inflation forecast holding."

Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards

Fed Chair Jay Powell and his colleagues on the Federal Open Market Committee have been emphasizing they want to be sure inflation is moving "sustainably" down to their 2% target before starting cuts and that, in the interim, they expect to hold rates higher for longer.

That stance isn't expected to change this week. Officials are widely expected to hold the Fed’s benchmark rate steady on Wednesday, leaving it at a 23-year high.

A mixed picture

Policymakers are expected to stay cautious because the latest readings on inflation and the economy offer a mixed picture.

The labor market added 272,000 nonfarm payroll jobs in May, significantly more additions than the 180,000 expected by economists, but the unemployment rate rose to 4% from 3.9%.

Prices aren’t accelerating as much as they were during the first quarter, but recent readings also don’t show enough progress for the Fed to start cutting.

The year-over-year increase in the Fed’s preferred inflation gauge — the "core" Personal Consumption Expenditures index — was 2.8% in April, unchanged from March.

Another complication is that wages are showing resilience as well. Wage growth was stronger than expected in May, clocking in at 4.1%.

Read more: How does the labor market affect inflation?

Fed officials will get a fresh reading from another inflation gauge, the Consumer Price Index (CPI), just hours before concluding their policy meeting this Wednesday. It is expected to show continued moderation during May after an encouraging April.

The year-over-year change in "core" CPI — which excludes volatile food and energy prices the Fed can’t control — is expected to edge down a tenth of a percent to 3.5%, compared with 3.6% in April and 3.8% in March.

A 3.5% print on CPI may not be enough to inspire confidence at the Fed, according to George.

"I think it's just going to take them quite a bit longer to figure out what the trend is," George said.

Betting on September

Powell has made clear that he thinks the Fed will need more than a quarter's worth of data to make a judgment on whether inflation is steadily falling toward the central bank's goal of 2%.

The September meeting is viewed by many as an optimistic case for cutting rates since the three inflation reports due out between now and then would all need to show improvement for the central bank to pull the trigger.

In the meantime, investors' expectations for the number of rate cuts this year have swung wildly.

Odds for a first cut in September fell to roughly 52% following the hotter-than-expected jobs report released Friday, and wagers for a second rate cut dwindled to little more than a 38% chance in December.

Luke Tilley, chief economist for Wilmington Trust, is more optimistic. He expects the central bank will have enough data to change its tune by its policy meeting on July 31.

The inflation data in the first month of the second quarter has helped calm fears about hotter readings in the first quarter, he said, and the CPI data out Wednesday will offer further reassurance.

"By the time July 31st comes around, they'll have three more months of inflation data," Tilley said. "I think they'll be back on the front of their feet and off their heels and ready to cut. But it really comes down to how that data comes out."

Wednesday will also bring other new Fed projections for investors to digest this week, as policymakers will also offer fresh forecasts for inflation, the economy, and unemployment.

And there will be the usual high level of scrutiny on whatever Powell has to say at his regular press conference following the meeting.

Wilmer Stith, bond portfolio manager for Wilmington Trust, is looking to see whether Powell takes a more hawkish tone.

"Is he going to be like a [Minneapolis Fed president Neel] Kashkari and other members who say we need to be higher for longer?" said Stith.

"It's hard to say because if we continue to get the economic growth and the labor market strength that we've seen, I don't even know why they'd want to do one cut."

Stith said he thinks officials will pencil in two rate cuts. If the Fed only marks down just one, that could add some volatility to markets, he added, even though that is currently what investors expect.

There is a risk the Fed could become too patient in its quest to be sure inflation is dropping, George said. Holding rates this high for too long could also sow the seeds of a recession.

"That's the risk they're running here, [which] is to say 'time is on our side,'" she said.

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