Navigating the Goldilocks Scenario: The Fed’s Inflation-Fighting Efforts

Investors and the Federal Reserve are on a collision course this week as the central bank seeks to slow inflation-fighting efforts without signaling a readiness to halt them. Despite the slew of interest rate hikes from Chairman Jerome Powell and colleagues in 2022, financial conditions are the loosest since last February as investors bet fading inflation will allow the central bank to soon cease raising borrowing costs and then cut them later this year.[0]

This week, the Fed is widely expected to reduce the pace of rate hikes to a quarter of a percentage point, following a similar deceleration in December when it hiked by half a point instead of three-quarters.[1] Powell has a clear incentive to push back against the trade given rising stocks and bonds could fan the very inflation they seek to contain.[2]

Per the Fed’s dot plot forecast, policy makers anticipate the fed-funds rate, currently at 4.25% to 4.5%, to reach above 5% and remain there; this prediction contrasts with the fed-funds futures, which are pricing in the likelihood of rate cuts by the end of the year.[3] Based on the Fed’s guidance, the current Federal Funds rate of 4.33% implies that the Fed has another 75 basis points to go before pausing.[4]

The expectation is that the Fed will hike 25bpt on February 1st, 25bpt on March 22nd, and 25bpt on May 3rd, and keep the rate at 5.1% until the end of 2023.[5] Inflation trends are falling but still far from the Fed’s Goldilocks 2% target with the y-o-y headline CPI still 6.5% and Core CPI 5.7%.[6] Given the figures, the probability of the Federal Reserve raising interest rates by 50 basis points next month is less than 10%.[6]

The Fed is aiming for the delicate balance of slowing inflation without depressing economic activity too much, a “Goldilocks scenario” where the economy is not too hot and not too cold.[7] Lael Brainard, Vice Chair of the Federal Reserve, suggested that it is still possible for inflation to decrease and employment to be retained without considerable job losses, provided that aggregate demand remains steady.[7]

The Fed must deal with something that it has not had to deal with since the 80s, and that of course is inflation.[8]

0. “Fed’s Wall Street Clash Sets Stage for Powell’s Hawkish Message” Yahoo! Voices, 30 Jan. 2023,

1. “Wall Street is ignoring the Fed. That could be dangerous – KION546” KION, 27 Jan. 2023,

2. “Fed’s Wall Street Clash Sets Stage for Powell’s Hawkish Message” Forex Factory, 30 Jan. 2023,

3. “Tech rally is ‘biggest game of chicken between the Fed and the market I’ve ever seen,’ says analyst” Morningstar, 24 Jan. 2023,

4. “Fed To Signal Hawkish Pause – Stock Market Implications” Seeking Alpha, 30 Jan. 2023,

5. “Fed Meeting Preview: The Magic Show of Interest Rates, Inflation, and Growth” Action Forex, 30 Jan. 2023,

6. “A Very Volatile Morning For Stocks | MENAFN.COM” MENAFN.COM, 25 Jan. 2023,

7. “Market vs Fed”, 29 Jan. 2023,

8. “S&P 500 Forecast: Playing Chicken with the Federal Reserve”, 30 Jan. 2023,