The current tumultuous inflationary environment may have peaked as the most recent US Fed rate hike showed a dovish side of the central bank. However, Franklin Templeton Fixed Income believes the war against inflation may not have been fully won yet.

“The most surprising and dovish part was Fed Chairman Jerome Powell’s repeated arguments that financial conditions have tightened significantly over the past year. The truth is that they had temporarily tightened between August and early October, when the Fed had signaled a more determined anti-inflation stance but have loosened significantly thereafter,” writes Sonal Desai, CIO, Franklin Templeton Fixed Income.

The asset manager argues that Powell sounded like he was going through the script and did not truly believe that inflation had eased during the speech after the US Fed rate hike announcement. Desai goes on to talk about the labour market, core non-housing services in the context of disinflation and Powell’s speech, which also mentioned that rate cuts may not be likely this year if inflation didn’t fall.

Separately, Franklin Templeton says that Powell did not talk about the loosening financial conditions may make its harder for the US central bank to contain inflationary risks, nor did the US Fed chief talk about the strong job market and the unlikely fall of wage growth.

“Markets believe that the war against inflation has already been won, and Powell sounded like he wants to believe that, too,” says Desai.

However, the asset manager talks about certain reasons why the path ahead could be challenging, such as the respite to the real estate sector, the tight labour market and the short-term inflation expectations.

“Powell claims that the Fed prefers to run the risk of tightening too much than too little, but the opposite appears to be true,” adds Desai.

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