US stocks are still going up on Wednesday, as markets are eagerly waiting for tomorrow’s release of the consumer price index (CPI) report for December, which might demonstrate if Wall Street’s recent surge in optimism was justified or exaggerated.

The current consensus is that CPI will drop to 6.6%, making it the lowest rate in over a year. Though still high compared to the official target of 2% and unlikely to affect the Fed’s decision to keep interest rates high for a long time, this much we’ll know: the price increases are significantly slowing down.

In retrospect, the moderation of inflation in the US has come a long way. Back in June, the annual rate stood at 9.1%. However, with commodities pulling back from the year’s highs, the CPI has been on the downward slope since then, with the November reading moderating to 7.1%.

In addition, tomorrow’s report comes on the heels of the employment figures published last week, which showed wage growth slowing in the last month of the year — a critical element in making inflation projections.

Therefore, should we see a positive surprise in the inflation reading, we may witness a rally in both stocks and bonds, as this may be a key factor for the Fed in its next interest rate decision-making meeting on February 1. The better-than-expected reading would lend support to the current market consensus that interest rates will rise by 0.25% rather than 0.5% as previously thought.

The latest wave of optimism comes from the fact that oil and gas prices are still going down because Europe’s winter was warmer than usual. This may improve the Fed’s outlook and persuade its officials to change their minds about how fast they want to raise interest rates or even stop doing so altogether.

However, not everyone shares this optimistic outlook. Jamie Dimon, CEO of JP Morgan, claims that the Federal Reserve will stick to its guns. In his interview with the Fox Business Network, he said that he was not sure that a 5% interest rate would be sufficient to bring the CPI to its 2% target. In his opinion, the Fed’s rate may go as high as 6% this year, as it is still focused on fighting inflation and preventing it from getting out of control.

The Fed’s chairman, Jerome Powell, gave a speech yesterday that provided enough insight to indicate that there would be little change in the Fed’s approach to dealing with inflation and that it might even go against the current market consensus. He said that difficult decisions are unavoidable in the struggle against high inflation. He noted: “Price stability is the bedrock of a healthy economy and provides the public with immeasurable benefits over time. But restoring price stability when inflation is high can require measures that are not popular in the short term as we raise interest rates to slow the economy.” 

Clearly, Jerome Powell is determined to bring inflation under control and is uninterested in satisfying the markets. On the other hand, the wait is nearly over, so there is no reason to speculate. In fewer than twenty-four hours, we will find out whether or not the Federal Reserve is ready to make the much-anticipated policy shift.