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The Federal Reserve is expected to continue raising interest rates in an effort to tame inflation.

The headline consumer price index (CPI) hit a high watermark in June 2022 and has decelerated every month since. The core CPI has also showed tentative signs of peaking in recent months. However, both are still uncomfortably near four-decade highs.

There are a number of reasons to believe that inflation has peaked. First, the global supply chain is recovering from the disruptions caused by the COVID-19 pandemic. This will help to alleviate supply-side inflationary pressures. Second, demand-side pressures on inflation are also showing signs of stabilizing. Wage growth is slowing, outsized fiscal stimulus from the last couple of years continues to fade, and excess savings are burning off relatively quickly.

As a result of these factors, we anticipate a more pronounced slowdown in inflation during 2023. However, inflation is still likely to remain elevated, likely heading toward 3% to 4%. This means that inflation will stay above the Fed's target level for the year. We envisage additional slowing in inflation in 2024 and 2025 as it falls to near the Fed's flexible target rate of 2%.

The Federal Reserve is not expected to cut interest rates until the end of 2023 at the earliest.

The Fed raised interest rates aggressively in 2022 in an effort to tame inflation. The pace of rate hikes is expected to slow, and the Fed is not expected to cut rates until the latter half of 2023 at the earliest. The Fed will need to see clear evidence that inflation is headed toward target before it will cut rates. This means that the path for interest rates is uncertain in the near term. However, by 2024, the Fed is expected to cut rates in order to restabilize the economy and get growth moving in the right direction again amid lower inflation.

Things to note:

The war in Ukraine is also a factor that could contribute to higher inflation in 2023.

The impact of inflation on households and businesses will vary depending on their circumstances.

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