It's been a harrowing year for markets and investors are tired. Months of sky-rocketing inflation and interest rates, the peaks and troughs of unpredictable economic data, churning geopolitical chaos and warning sirens of imminent recession were enough to make even the most hardened trader weary.
But a number of signals this week are pointing to calmer waters ahead. The question is whether we've made it past the worst of things or if we're simply in the deceptively sunny eye of the storm.
What's happening: Price increases in the United States cooled more than economists expected last month, recording the lowest level of growth since last December. Annual inflation in November was 7.1%, down from 7.7% in October, according to the Bureau of Labor Statistics' closely watched Consumer Price Index.
This is the second consecutive month of moderating price pressures and could mean the underlying trend of inflation is finally decelerating. That's a welcome and hopeful sign for consumers, policymakers and investors, said Jim Baird, chief investment officer at Plante Moran Financial Advisors. "There's growing evidence that the worst of the inflation scare may be in the rearview mirror," he wrote in a note on Tuesday.
Recession fears are also ebbing a bit. The economy is cooling in some sectors — housing has taken a hit, manufacturing is slowing and consumer and business confidence are lower. But Americans have proved resilient. They're still spending and the job market remains healthy. A soft-landing is not a given, but the runway appears wider than it did a few months ago.
That leads us to today's Federal Reserve policy rate decision where officials are largely expected to ease up in their painful fight against inflation. Investors are pricing in a half-point increase in interest rates after four consecutive three-quarter point hikes.
The economy is still in flux. Inflation is two percentage points lower than it was at its June highs but the typical American household still needs to shell out $396 more per month than a year ago to buy the same goods and services, according to Moody's Analytics. Federal Reserve officials have also made it clear that rates will remain elevated for some time. But we could be nearing a turning point.
If this momentum continues, "we could then see the Fed pause over the next few months at a still restrictive policy-rate, but not one which would put potentially excessive pressure on the economy," said Rick Rieder, BlackRock's chief investment officer of Global Fixed Income.
Monitoring the tide: Fed watchers will keep a close eye on the central bank's Summary of Economic Projections today for clues about where policymakers think inflation, economic output and unemployment will land over the next year. They'll also be paying attention to Federal Reserve Chair Jerome Powell's press conference to see if he strikes a hawkish or dovish tone about the prospect of future rate hikes.
But barring unexpected bad news, the Fed is getting ready to shift its messaging from the United States falling behind the curve on inflation to moving more gradually and allowing time to see the effects of their previous rate hikes on the economy, said the Yale School of Management's Bill English, a former Fed senior economist.
"I'm still expecting some more rate hikes, but if there are no surprises by March they'll be in a place where they can reevaluate their current regimen," he said.
At that point, traders might be able to breathe a sigh of relief as the economy becomes relatively boring again.
The Fed is hoping that monetary policy also becomes less exciting, said English. The next few months will determine how quickly we get there.
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