(Bloomberg) -- When Jerome Powell stepped up to the podium at 2:30 p.m., the Federal Reserve had just carried out its expected quarter-point interest-rate hike and markets had barely budged.

Forty-five minutes later, when the chair stopped speaking, stocks and Treasuries had taken off — even though he said interest rates would likely end up higher than investors expected and he pushed back on cuts that markets had priced in for this year.

What investors chose to hear as Powell’s message: a more upbeat outlook on inflation and his failure to forcefully push back on recent market rallies that have limited the effectiveness of central bank tightening.

“He wasn’t objectively dovish but he wasn’t overly combative in pushing that point and that was enough for the market,” Wrightson ICAP LLC chief economist Lou Crandall said.

Speaking to reporters on Wednesday in Washington, Powell said policymakers foresee a “couple” more rate increases from the new target range of 4.5% to 4.75%, already up from near zero levels last March.

But he also suggested officials are open to adjusting their plans if price pressures cool as fast as investors expect. And when asked about the easing in conditions in financial markets — which could make it hard for the central bank to curb high inflation — he didn’t sound particularly alarmed.

“He almost kind of gave a green light to what’s been taking place,” said Karim Basta, chief economist at III Capital Management.

Fed officials have been undertaking the most aggressive tightening campaign since the 1980s to quell the strongest inflation in a generation. The 25 basis-point move they delivered Wednesday was a moderation from a half-point hike in December and four jumbo-sized 75 basis point increases prior to that.

What Bloomberg Economics Says…

“Soft inflation data in recent months haven’t been convincing enough for the Fed to consider pausing its rate-hike campaign just yet. By continuing to refer to “ongoing” rate hikes, the FOMC is hinting that they expect at least another two 25-basis point hikes, affirming their view of a terminal rate at 5.25.”

— By Anna Wong, Eliza Winger and David Wilcox (economists)

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Powell acknowledged that the US economy is now in an era of “disinflation” with price pressures cooling. But he emphasized that more data is needed before the US central bank is able to declare victory, without specifying exactly how many more months of data it would take for officials to be convinced that inflation is on the right path.

“We think we’ve covered a lot of ground,” Powell said. “Even so, we have more work to do.”

The Fed statement issued after the two-day meeting retained previous language noting that “ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.”

But in a hint that the rate-hike campaign may be winding down soon, the Fed said the “extent of future increases” in rates will depend on a number of factors including cumulative tightening of monetary policy. It previously tied the “pace” of future increases to those factors.

Powell, during his press conference, added to that sense.

“We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive,” he said.

Investors wanted to know if Powell would push back against market expectations that the Fed will cut rates later in the year as inflation eases and economic growth slows. He did.

“Restoring price stability will likely require maintaining a restrictive stance for some time,” he told reporters. While recent readings on price pressures were encouraging, he added that “I just don’t see us cutting rates this year,” if the economy evolves as he and his colleagues expect.

Even so, investors saw enough wiggle room to increase bets that the Fed would lower interest rates by 50 basis points in the second half. 

The Fed’s favorite gauge slowed to a year-on-year rate of 5% in December from 7% in June. Policymakers will have at least two more months of inflation data and two more updates on the labor market before they meet again in March, and at least one more month of reports before they meet in May.

“The Fed is encouraged by the progress that they’ve seen,” said Sarah House, senior economist at Wells Fargo & Co. “But they’re still a little bit weary of whether they’ve done enough tightening to get inflation back down to 2% for the long haul.”

--With assistance from Catarina Saraiva and Rich Miller.

©2023 Bloomberg L.P.