Federal Reserve (Fed) Chairman Jerome Powell stepped to the podium at his most recent press conference and delivered a very clear message: The market should expect rates to remain higher for longer.

This sent markets lower and led to an aggressive repricing higher of the Fed’s terminal rate. This was promptly met with weaker than expected inflation numbers that sent financial markets significantly higher and yet again led to a repricing of the Fed’s terminal rate—this time much lower.

So where do we stand?

Yes, inflation remains the chief concern for markets and the economy right now, and yes, the Fed raised rates by another 0.75% in an effort to slow demand to bring inflation back down. It is true that inflation now appears to be coming down (though we’d caution that one data point does not make a trend). But both things can be true at once—the Fed can and will remain committed to fighting inflation at the same time as it is falling. This is, in fact, what we expect to be the case.

Chair Powell indicated in his last press conference that the pace of rate hikes may slow in the coming months. This idea was likely reinforced by the most recent inflation print that saw a turbo-charged rally the day of the release. While Powell’s dovishness did not go as far as some would have liked in his commentary, this was the first indication all year that the Fed may ease off the brake and the idea has gained steam on the back of the inflation data.

Up through last week, there had been a growing chorus of market participants expecting the Fed to ‘pivot’ away from aggressive rate hikes to a more ‘dovish,’ pro-economic growth stance at the meeting. Instead, they were presented with a more neutral commentary, which seemed to dash any hopes of a rapid step down in the Fed’s efforts to fight back against inflation. Those investors did not get the full ‘pivot’ they were hoping for. A week later, a weaker than expected inflationary result sent markets higher.

It is clear that the market is eagerly awaiting a less hawkish Fed.

Our Base Case: Actions Speak Louder than Words

While the higher-for-longer stance was ultimately a disappointment for many, the weaker inflation data has provided the reason for optimism many market participants have been waiting for. This is particularly true in long-duration sectors such as Information Technology.

Our view here at Manning & Napier has been that the Fed has become an inflation fighting institution first and foremost, and we expect them to remain committed to that task. Inflation is currently running at levels roughly 4x the Fed’s target rate, and underlying indicators continue to see pressure.

At the threat of stating the obvious, this is a problem. While we are starting to see pain in areas such as housing and in the more forward-looking economic survey data, the consumer still looks healthy, and the labor market has shown very few signs of weakening, providing the Fed ample cover to continue down its current path of hiking rates, even if this does occur at a slower pace.

Our base case continues to be that we are in a challenging environment for financial markets. The US economy is likely to slow in response to aggressive monetary policy and the weak economic backdrop globally. The Fed will likely remain a headwind to markets, rather than the tailwind it was for much of the last decade, as it continues its fight against inflation. While weak economic growth should eventually push bond yields lower, inflation and the Fed’s response to it is still exerting upward pressure on yields for the time being. This challenging backdrop highlights the importance of active asset allocation and equity selection as we balance managing portfolio risk with our desire to take advantage of the attractive opportunities are being presented with.

Our research team continues to monitor these topics and more. If you’re interested in hearing more of our monitoring points and views on an array of investing themes, then subscribe to our insights.

This material contains the opinions of Manning & Napier Advisors, LLC, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy, or investment product.