Is the Federal Reserve done raising interest rates?

That’s the question being hotly debated on both Main Street and Wall Street a day after the central bank again held its trendsetting federal funds rate in its current range of 5.25% to 5.50%, the highest level in 22 years.

While some economists are cautioning that it’s too early to assume that the next move from the U.S. central bank will be a rate cut, markets appear to be celebrating. Indeed, all the major stock indices are rallying higher today and the blue-chip Dow Jones Industrial Average is up more than 400 points.

Treasury Yields Retreat

Helping to fuel the rally in stocks today is the fact that U.S. Treasury yields are pulling back as traders bet that the Fed is indeed done raising interest rates. The yield on the benchmark 10-year Treasury bond is down nearly 12 basis points at 4.67%. Meanwhile, the yield on the 2-year Treasury note fell to 4.92% in early trading — a two-month low — before rebounding slightly.

Speaking to the media, Fed Chair Jerome Powell again said that further interest rate hikes are possible and stressed that it’s premature to talk about lowering rates. However, Powell’s language softened, particularly when discussing the state of the U.S. economy. Previously, Powell had said that economic growth in America needs to slow substantially for inflation to fall back to the Fed’s 2% annualized target. This time, though, the Fed Chair said that he is starting to see signs that the U.S. economy’s growth is easing.

This more relaxed language has traders on Wall Street betting that the U.S. central bank will again leave interest rates unchanged at its last meeting of the year on Dec. 13. Prior to the latest Fed meeting, futures traders were betting that there was a 29% chance that the central bank will raise interest rates in December. That chance is now closer to zero and the betting is that the Fed will cut rates by mid-2024.

Inflation Is Still an Issue

While stocks are climbing on expectations that interest rates have now peaked and are likely to come down in the next six months, some economists are sounding a cautious note, pointing out that inflation remains a problem. The inflation rate in the U.S. is currently at an annualized 3.7%. While that level is down substantially from a peak inflation rate of 9.1% recorded in June 2022, it’s still almost double the Fed’s 2% annualized target.

It’s also worth noting that after steadily declining for a year, inflation in the U.S. rose for three consecutive months between July and September of this year, growing from 3% to 3.7%. At the same time, most indicators point to a U.S. economy that remains very strong. U.S. gross domestic product (GDP) grew at a 4.9% annualized rate in this year’s third quarter, which is very strong and better-than-expected.

The October jobs report to be released tomorrow, Nov. 3, will provide a clearer picture on the current state of the U.S. labor market and economy. Fed Chair Powell has said that the central bank wants to see some softening of jobs before it feels confident that the economy is being cooled by higher interest rates.

What’s Next?

Markets are jubilant following the Fed’s latest pause on interest rates. After recording declines over the previous three months and sliding into correction territory, U.S. equity markets are off to a strong start in November. While it’s nice to see stocks in the green again, investors should proceed carefully as inflation still remains high by historic measures and the Fed’s job may not yet be done.

On the date of publication, Joel Baglole did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.