Federal Reserve Chair Jerome Powell kept the possibility of another interest rate in play during a key speech last week. Still, with inflation continuing to cool, investors are increasingly betting that the tightening campaign has come to an end.

In his closely watched speech last week, Powell downplayed recent declines in consumer prices, suggesting it's still too early to declare victory, or discuss when the central bank may begin to cut interest rates.

"It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease," Powell said while speaking at Spelman College in Atlanta. "We are prepared to tighten policy further if it becomes appropriate to do so."

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Despite the hawkish overtures, investors see a near 100% chance that Fed officials will hold interest rates steady at their final meeting of the year on Dec. 12-13, according to data from the CME Group's FedWatch tool, which tracks trading. 

"Markets view those comments as inching toward the dovish camp," said Jeffrey Roach, chief economist at LPL Financial, of Powell's latest speech. "A few weeks ago, Powell said policy is restrictive but now, he believes policy is ‘well into restrictive territory.’ I think it’s fair for markets to latch on to that subtlety."

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In fact, many investors expect the central bank to begin cutting rates in the middle of next year amid signs the economy is cooling. Analysts at Bank of America, UBS and Deutsche Bank are among those predicting rate cuts in 2024, as early as March and as late as July.

"We think the market may have run ahead of the likely pace of cuts," said Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management. "Our base case is that the Fed will deliver two to three cuts next year, with the timing data dependent, but most likely starting in July."

The Fed voted during meetings in both September and November to hold interest rates steady at a range of 5.25% to 5.5%, the highest level in 22 years. Officials are now trying to figure out whether they have tightened monetary policy enough or whether they need to raise rates higher in order to crush still-high inflation.

While inflation has cooled considerably in recent months, it remains up 3.2% compared with the same time a year ago, according to the most recent Department of Labor data.

Economic projections laid out after the Fed's September meeting indicated that a majority of Fed officials who participated expect rates to rise to 5.6% by the end of 2023, indicating that policymakers believed there was still more work to be done to wrangle inflation under control. Twelve of the 18 officials predicted one more quarter-point rate hike, while six supported keeping rates unchanged.

The quarterly forecasts also indicate the central bank will cut interest rates in 2024, to a rate of about 5.1%. 

But many Fed officials have signaled in recent weeks that rate hikes are over, even as they push back on market expectations for steep rate cuts.

"My assessment is that we are at, or near, the peak level of the target range of the federal funds rate," New York Fed President John Williams said in a speech last week. He added: "I expect it will be appropriate to maintain a restrictive stance for quite some time to fully restore balance and to bring inflation back to our 2% longer-run goal on a sustained basis."

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Policymakers have raised interest rates sharply over the past year, approving 11 rate increases in the hopes of crushing inflation and cooling the economy. In the span of just 16 months, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s.

Hiking federal rates tends to create higher interest rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 7% for the first time in years. Borrowing costs for everything from home equity lines of credit to auto loans and credit cards have also spiked.