Federal Reserve Chairman Jerome Powell provided a real buzzkill after the Fed's November meeting earlier this month when he told reporters that "the ultimate level of interest rates will be higher than previously expected."

Leading up to the meeting, investors had started to hope for a Fed pivot and that much of the Fed's interest rate hikes would be in the rearview mirror following the November meeting.

But while Powell effectively told investors to pump the brakes on those hopes, a pivot could still end up happening soon anyway.

Some signs of slowing inflation 

The Fed has been aggressively hiking its benchmark overnight lending rate, the federal funds rate, all year to get a handle on some of the highest levels of inflation seen in 40 years. But its efforts haven't manifested themselves a lot in the recent inflation data, which has shown that consumer prices are by and large too high.

Federal Reserve building.

The Federal Reserve Building. Image source: Getty Images.

Still, there has been some evidence that inflation is starting to peak. The Fed's recent Beige Book, published in early September, discusses economic conditions across all of the central bank's 12 districts. It said that while labor conditions remain tight, there has been an improvement in being able to find and retain workers, along with reports of slowing wage growth and more-tempered salary expectations from employees.

The labor market tends to be a lagging indicator, so cracks can take longer to show up, but if wage inflation and turnover are slowing, that is one sign that things might be cooling off.

Wage growth has been one major source of inflation, so the Fed is hoping to see some deterioration in the labor market. Recent October employment data, which showed that U.S. payrolls added a strong 261,000 jobs during the month, also showed unemployment rising from 3.5% to 3.7%.

The Fed might be running out of time

Most surveys of economists now show that they are expecting a recession to hit in 2023. It's going to be difficult for the Fed to keep hiking rates if unemployment is higher while people are dealing with the four consecutive 75-basis-point rate hikes the Fed has made. Those moved the federal funds rate up to a range of 3.75% to 4%.

So I think whether the Fed will pivot and slow the pace of its rate hikes will come down to its final meeting of the year in December. The Fed's initial projections had suggested that the federal funds rate would end the year at about 4.4%. That implies a half-point hike and would constitute some form of a pivot. But Powell's recent comments have led some to believe that there will be another 0.75 percentage point hike.

Market participants seem divided, but 61.5% still think there will only be a half-point hike in December, as of this writing, according to CME Group's FedWatch tool, which looks at data from 30-day futures on the federal funds rate.

If it's just a half-point hike in December, then it will look like the Fed is pivoting due to the slower pace of rate hikes and because it would likely signal that the Fed thinks inflation is starting to let up. 

Keep watching the data

Despite Powell's recent comments, I think he and other Fed members are watching the data from the jobs reports and the Consumer Price Index (CPI).

If the data can show clearer signs of inflation peaking, the Fed will likely let up. There are still two more big CPI reports this month and in December before the Fed's final meeting of the year, as well as another jobs report in December.

If the numbers can show some more tangible progress in slowing inflation, then I think the Fed would at the most do a half-point hike in December, meaning there could be a pivot just over a month from now.