Investors are bracing for another huge rate hike from the Fed. Here's why it's a critical moment for markets and the US economy.

• Investors are bracing for the Fed to announce another huge interest-rate hike on Wednesday.
• Fed Chair Jerome Powell is set to discuss the inflation threat and the risk of a recession.
• Here's why the rate decision and guidance will be critical for markets and the economy.

Investors are anxiously awaiting the outcome of the Federal Reserve's meeting on Wednesday.

Here's why the US central bank's interest-rate decision and guidance could have sweeping impacts on prices, jobs, economic growth, and financial markets.

Why do interest rates matter?

Higher interest rates help to rein in spending, hiring, and investment. They also increase borrowing costs, making credit cards, mortgages, and other types of debt more expensive. Therefore, central banks rely on them to reduce aggregate demand in the economy and relieve upward pressure on prices.

However, hiking too aggressively can undercut demand to the point where an economy contracts and enters a recession. Higher rates also tend to increase government-bond yields and thus the cost of public borrowing, and strengthen a country's currency, making its exports less competitive.

What's happening today?

The Fed is expected to hike its benchmark federal-funds rate by 75 basis points to a range of 3.75% to 4%. It has rapidly raised rates from near zero in March to combat inflation, which surged to a 40-year high of 9.1% in June, and was still above 8% in September.

Fed Chair Jerome Powell will also speak at a press conference today. Investors will be watching closely, as his comments about inflation and recession risks could signal the trajectory of rates going forward.

What are experts saying?

The market is already pricing in a 75-basis-point hike, so the messaging around what's coming next will be key, Nigel Green, the CEO of deVere Group, said in a morning note.

Green predicted that Powell would continue talking tough on inflation, but also tease a slowdown in the pace of rate increases.

"Powell will be walking a fine line on Wednesday of trying not to get the markets too excited about the potential scenario of less aggressive rate-hiking — hence the likely hawkish tone he will still adopt," he said.

Still, US core inflation was above 5% in September, and the number of job openings grew by 437,000 to 10.7 million. Ipek Ozkardeskaya, a senior analyst at Swissquote Bank, said those datapoints made it unlikely the Fed would pause its hikes or pivot towards cutting rates.

"For now, the US jobs market is not tightening, and the US inflation is not easing," she said in a morning note.

"So, there is no reason for the Fed to announce the end of the tightening cycle, in a way to trigger a positive euphoria across stock and bond markets, which would, in return, boost both inflation and jobs in the US."

The great Fed debate

Beyond today's meeting, market commentators are divided on whether the Fed should keep hiking to prevent runaway inflation, or ease off to avoid tanking the economy.

Larry Summers, the former US Treasury chief, has said rates may need to exceed 5% to conquer inflation. He has urged the Fed not to back down prematurely as it could cause stagflation — a toxic mix of declining growth, rising unemployment, and stubborn inflation.

In contrast, Tesla CEO Elon Musk, Nobel Prize-winning economist Paul Krugman, and Wharton professor Jeremy Siegel are among those who believe the Fed has already done enough, and risks doing more harm than good by continuing to raise rates.

Others question whether higher rates will solve the inflation problem. David Einhorn, a hedge fund manager, has noted they could discourage investment in homebuilding and other sectors, exacerbating shortages and drive prices higher.