Prices Cooling

With that said, the current market rally is not completely unjustified. Positive market sentiment is fueled by the widespread belief that inflation has peaked and is steadily moving towards the Federal Reserve’s target of 2%. The Consumer Price Index, a widely followed gauge for inflation, has shown inflation falling to just 3% year-over-year, its lowest level since March 2021. This achievement is widely regarded as a significant victory for the Federal Reserve. Recall, the Fed’s aggressive policy aimed at tackling inflation was a large catalyst in causing the turmoil in the first place.

Moreover, the prospect of the Federal Reserve achieving its desired inflation target without triggering a recession is becoming more plausible, often referred to as a “soft landing.” This belief carries substance, given that this year has witnessed one of the strongest labor markets since the 1960s, with the unemployment rate resting at a remarkable 3.6%. The growing credibility of this scenario further fuels market optimism, providing additional tailwinds for the ongoing rally.