It is widely expected that the Fed will hike by 25 basis points on Wednesday, bringing the upper end of the target range to 4.75%, far higher than projected a year ago. The dot plot released after the December meeting showed that a majority of the participants projected 75 basis points of hikes in 2023. This would be a 25-basis-point hike on Wednesday, one in March, and one in May. And then a pause for the rest of the year to see where inflation is going.

But on a month-to-month basis, the core PCE price index re-accelerated in December, though year-over-year it slowed to 4.4%. The PCE price index for services re-accelerated as well month to month, and year-over-year hit a new four-decade high. So, this was a step in the wrong direction.

Inflation has come down from the peak due to the plunge in fuel and a drop in durable goods prices. But it’s still very high, gasoline prices are already surging again, durable goods prices won’t drop forever, and inflation in services is red hot.

Inflation has a habit of dishing up nasty surprises. The Fed knows it, has repeatedly pointed at the upside risks to inflation, and has repeatedly emphasized the need to see “compelling” evidence that inflation has been squashed before rate cuts begin.

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