Stocks closed lower yesterday as investors contemplate how high interest rates are likely to go in 2023 and what that means for the economy.

Last week, Fed Chair, Jerome Powell, sparked a strong rally in stocks after reiterating his belief that the Fed was poised to slow the pace of interest rate hikes at the next FOMC meeting on December 13-14.

The market had been largely anticipating that, but his strong comments further underscored the likelihood that they indeed are on the cusp of the moderation part of their tightening cycle, and could be just a few more hikes away from stopping altogether.

That's bullish for stocks, especially as some have worried that the Fed might overdo it, after their unprecedented four, 75 basis point hikes this year (not to mention the 25 and 50 basis point increases that got the tightening cycle started).

The continued decline in inflation readings are showing that their monetary policy is starting to have its intended effect.

However, last Friday's stronger than expected employment report also showed that the Fed's job will not be easy, as wage growth continued to exceed expectations as well. And in some respects, wage growth inflation can be harder to tame.

So the good news that the strong jobs report highlighted last week, also brought with it some concerns.

And that's where the market finds itself currently. The resiliency of the economy has helped ease recession fears. But a too resilient economy could mean even higher rates than the Fed has forecast, and potentially holding them there longer.

At the moment, the market appears to be pricing in a 5% terminal rate. But the more stubborn inflation becomes, the more the terminal rate projections could shift and impact the market.

For now, however, Mr. Powell believes the prospect of a soft landing is "still achievable."

And if inflation keeps easing, while the economy can keep modestly growing, the market can keep climbing.

See you tomorrow,