Barring some unexpected turn, the Fed will almost surely downshift to “regular” rate hike increments early next month.

Although December’s CPI report was amenable to a “not there yet” interpretation (that’s the angle I took), it nevertheless underscored the peak inflation narrative.

Anything can happen, but absent another energy shock or, say, a geopolitical event that introduces new supply chain frictions, it’s not likely that headline price growth in the US will re-accelerate anywhere near the highs. From here, it’s just a matter of how long it takes for shelter inflation to cool, and based on timely indicators from both the housing market and rents, the Fed may not have to wait long.

My assessment (from the linked article above) was overtly cautious, and I think I’ll be forgiven, as will any Fed officials concerned about declaring victory prematurely. Sanguine views on inflation were synonymous with blissful ignorance in 2021, and then, in 2022, with reality denial.

That said, there’s no sense in dancing around the obvious: The odds now favor a step down to a 25bps hike cadence from the Fed at the next meeting, and it’s possible (albeit exceptionally unlikely) that the February hike will be the last. At one point Thursday, swaps showed less than 50bps of combined hikes priced for the February and March meetings. That’d suggest an outside chance that the Committee will pause in Q1.

Terminal rate pricing is now around one full 25bps increment below the peak seen in November, and a comparable distance from the 2023 dot.

After a run of aggressively hawkish banter from officials, Patrick Harker became the second Fed speaker in two days to suggest that 25bps is the likely cadence from here. His remarks followed similar comments from Susan Collins on Wednesday.

“I expect that we will raise rates a few more times this year, though, to my mind, the days of us raising them 75bps at a time have surely passed,” Harker said, in remarks prepared for an event in Pennsylvania. “In my view, hikes of 25bps will be appropriate going forward.”

“I think 25 or 50 would be reasonable, Collins told The New York Times’s Jeanna Smialek. “I’d lean at this stage to 25, but it’s very data-dependent,” Collins continued.

The risk of downshifting to 25bps is obviously an equity rally and looser financial conditions. The same goes for a prospective March pause. At some point, though, that’s a risk the Fed will have to take. Maybe that’s another “not there yet” dynamic. That is, we’re not yet to a place where the Fed can safely countenance a resumption of the wealth effect.

But eventually, the Committee will have to accept that whenever they pause, stocks are almost sure to rally, real rates will probably recede quite a bit and the dollar will fall further. All of that will ease financial conditions, which could, potentially, reinvigorate inflation.

There’s palpable concern in some corners that inflation will have a second act — that it’ll do its best impression of a left-for-dead killer in the final 15 minutes of an 80s slasher flick. For my younger readers, note that in the heyday of slasher films, the villain always “died” around 20 minutes before the credits rolled, only to get back up and try one more time to kill the protagonist.

In that context, the saving grace might be an earnings recession, to the extent a contraction in US corporate profits may help blunt the euphoria that’d otherwise accompany any indication from the Fed that “sufficiently restrictive” has been achieved ahead of schedule.

On Thursday, Harker nodded to the harsh realities of inflation on Main Street. “High inflation is a scourge, leading to economic inefficiencies and hurting Americans of limited means disproportionately,” he declared. “I find it particularly disturbing that life’s true essentials like groceries, fuel and shelter have skyrocketed in price.”

That being the case, it’s odd that the Fed tends to look past food, shelter and energy when assessing the underlying trend in inflation.