After a bruising last few years for the Federal Reserve, and with inflation now on a downward trend and economic growth still only moderately decelerating, the Fed must feel it is close to achieving the ultimate central bank goal of aggressively raising interest rates and quelling inflation, without provoking a recession. However, it is still too early to don the laurel wreath and run a victory lap. The Fed is very aware that getting it wrong again would cause any credibility that it may have managed to restore in the last few months to rapidly evaporate. It also knows that policies act with a lag, so there is likely plenty of tightening left in the pipeline; hence, it is far from clear that a recession has yet been avoided. From a risk management perspective, the Fed is concerned that there are still a number of factors that could come into play and unsettle longer-term inflationary expectations, making that final mile—from 3%-4% inflation back to 2%—that much more difficult to achieve.

In this Economics Weekly, and in light of yesterday’s inflation report, we reexamine the inflation narrative and what the Fed might be wary about with regard to signaling a more-acute change of policy.

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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.