Has the Fed beaten inflation?

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Yesterday, Fed Chair Jerome Powell did his best impression of a football coach whose team holds a third-quarter lead: Our game plan to tame inflation is working so far, he suggested, but don’t douse me in Gatorade just yet.

Following the Fed’s first meeting of the year, the central bank hiked interest rates by the expected 25 basis points. It’s the smallest rate hike since last March, and a sign that the Fed’s bitter struggle to rein in prices is having an impact.

  • Annual inflation fell to 6.5% in December from a peak of 9.1% in June.
  • There’s even a good chance your Super Bowl party will cost less than last year’s. Prices for chicken wings, avocados, and steak have all fallen since last January (along with those of many other goods).

In a closely watched press conference, Powell emphasized “it is a good thing” that prices are coming down in many sectors.

But he isn’t ready to hang up the “Mission Accomplished” banner

Powell made it clear that Americans should expect “a couple more rate hikes” going forward. The concern? Inflation is a nasty beast—there’s no guarantee it’s going to keep on falling like it has been.

And some economists have pointed to signs that activity is picking back up again right when we need it to continue slowing down: Housing demand is coming off of its lows, gas prices have climbed since December, and the labor market is still running too hot for the Fed’s liking.

Making things even dicier for Powell is the recent stock market rally. So far in 2023, investors have been gobbling up stocks as if the inflation problem has already been solved. But, in an ironic twist, their optimism that inflation is toast…could actually push inflation higher by boosting asset prices.

If there’s one lesson to be learned from all of this, it’s never go into macroeconomics if you value getting things right the first time.