After more than five years of missing its target, Federal Reserve officials are confident they can curb inflation to 2% by 2029 with only modest increases in U.S. interest rates. Despite earlier doubts, a growing consensus among economists and financial professionals now supports the central bank’s credibility under its new leadership.
“We can definitely get to 2% inflation in two years’ time,” said Gregory Daco, chief economist at EY Parthenon. The shift in sentiment follows a decisive policy move by the Fed: raising the key short-term interest rate for the first time since mid-2023, while signaling that at least one, and possibly more, hikes could follow.
The policy pivot comes under Chair Kevin Warsh, appointed by President Donald Trump in May. Warsh initially faced skepticism due to his reluctance to act aggressively on inflation despite his rhetoric about restoring pre-pandemic price stability. However, a major speech in late August criticizing stubbornly high prices was widely interpreted as a turning point, convincing investors that he was prepared to make difficult decisions.
“Whether the Fed or investors think 2% [inflation] is attainable is secondary to his message,” said Will Compernolle, macroeconomic strategist at FHN Financial. “He was able to convince markets he was going to do what it takes to bring inflation down.”
While higher borrowing costs remain a proven tool to dampen economic demand, Warsh acknowledged the limits of monetary policy regarding supply-side shocks. Following the rate decision, he stated, “We cannot affect any individual price, whether it be oil prices, whether it be foodstuffs at the grocery store.”
The current inflationary environment has been driven largely by external factors, including the Trump administration’s 2025 tariffs—which increased costs for businesses—and the partial closure of the Strait of Hormuz during the ongoing conflict with Iran. These supply disruptions pushed inflation above 4% this spring. Additionally, the protracted war has kept energy prices elevated, creating significant headwinds for the Fed’s goals.
Stephen Douglas, chief economist at NISA Investment Advisors, noted that underlying trends were favorable before trade tensions escalated. “The Fed was on track to get to 2% before the tariffs,” Douglas said. “We think inflation is going to return to the low 2% range over the next few years largely on its own.”
Despite the recent progress, economists disagree on how many additional rate hikes are necessary. The Fed itself appears to anticipate only one or two more increases. Sal Guatieri, senior economist at BMO Capital Markets, agreed with this outlook, stating, “We think one more will do the trick. We are not seeing lots of inflationary pressure outside of these supply shocks.” He pointed to cooling goods prices and muted labor cost growth as evidence that inflation is not broadening.
Conversely, some market participants and analysts argue for a more aggressive stance. Data from the CME Group’s FedWatch tool indicates investors are pricing in three additional hikes by April. Alex Pelle, senior U.S. economist at Mizuho Securities, warned that excessive demand driven by robust consumer spending and an artificial intelligence investment boom could sustain inflation independently of supply shocks. “Demand is also excessive,” Pelle said. “It’s not going to go away completely on its own.”
There are also concerns that an overly aggressive approach could harm the broader economy. Daco cautioned that a super-aggressive Fed risk delivering a stinging blow to U.S. economic growth or triggering a recession, potentially resulting in significant job losses. “The reality is, the Fed is raising monetary policy to destroy demand to bring underlying inflation under control,” Daco said.
Ultimately, the path to the 2% target remains dependent on variables beyond the Fed’s control, particularly the resolution of the Iran conflict and subsequent drops in oil prices. As Guatieri noted, “This is the big wild card for the Fed. The Fed can’t ignore that.”
Honest question: how do we get to two percent when tariffs and oil shocks are still driving costs up so much?
Does anyone else think one more hike is enough? The AI boom could easily keep demand—and prices—higher than expected.
I’m surprised how quickly Wall Street turned around. Five years of missing targets must have really frustrated them.
Finally, some action from the Fed. That rate hike proves Warsh is serious about killing inflation once and for all.