To hike, or not: Is the Fed’s inflation fight finally over?

The mega rally on Wall Street in 2023 hasn’t been the only thing that many economists and analysts have gotten wrong. The staggering drop of inflation has confounded many market watchers, with the Consumer Price Index falling to 3%, from a high of over 9% seen last summer, as well as the central bank’s favored inflation gauge – the core personal consumption expenditures price index. Data on Friday showed the figure to have moderated on a M/M and Y/Y basis, inching closer to the Fed’s key 2% target that is needed for stable prices in the U.S. economy.

Fool me once? Following an infamous “transitory” call from 2021, Jay Powell and Co. made a serious policy U-turn, ratcheting up rates from near zero to 5.5% in the span of 16 months. A technical recession ensued in the first half of 2022, but the U.S. economy has been resilient since then, with quarterly GDP recently growing at a 2.4% annualized rate, or almost a full percentage point stronger than the 1.5% expected. Inflation numbers have also routinely come in better than anticipated, prompting many investors to consider whether the central bank continues to be overly cautious in its fight against inflation to compensate for criticism that it had been late (really late) to the game.