Financial markets were swigging the Christmas sherry today after Fed chairman Jerome Powell effectively declared an end to the painful cycle of monetary tightening that has put a dampener on the global economy for two years now.
The Dow hit a new all-time high, while over here the FTSE 100 put on more than two per cent as relief swept through trading floors in the City and Wall Street.
While it is great to feel a bit of optimism for a change, particularly at this time of year, it might be wiser for the markets to keep the champagne on ice for a while yet.
Inflation has fallen sharply but is still at elevated levels above the standard 2% target of most western economies.
The steep fall in the oil price is helpful for now but it is still very early in the winter. A prolonged cold spell in north America or western Europe could send that spiking in the opposite direction.
Conflict is still raging in Ukraine and Gaza and continued geopolitical volatility will be a theme well into 2024.
We are about to enter a US election year so the government spending taps will continue pouring demand into the world’s biggest economy to keep the electorate in a good mood ahead of polling day in November.
So the inflation genie is not yet fully back in the bottle, and that is before the impact of unexpected events — the unknown unknowns — that have wrecked the best laid time and time again over recent decades.
At the Bank of England, Andrew Bailey and chums will be viewing the excitability of the markets with wry amusement. They have come too far to let inflation back out of the box with premature rate cuts. It will be steady as she goes.
Once the markets are back from Christmas in the dark days of January the reality will set in. Things are heading in the right direction but the inflation war is not over yet.
