Stocks plunged after Fed's Powell indicated only one more rate hike was likely, as the central bank sought to contain inflation. But investors worried that any further increases would stall economic growth and push it into recession.

Powell also indicated the Fed may take additional action if inflation remains too high. This provided markets with some much-needed comfort, as they had grown increasingly nervous about the central bank's capacity to prevent financial instability and end its aggressive rate-hiking cycle.

1. Inflation isn’t going away

Inflation is the gradual rise in prices of goods and services, diminishing your money's buying power over time. That means if you saved $10 from 1980, it would only buy two fewer movie tickets in 2019 if inflation continues to accelerate.

Since mid-2016, inflation has been rampaging through the economy - impacting household budgets. A dollar today is worth approximately 11 cents less at the grocery store, 15 cents less on utility bills and six cents less for rent or housing costs.

Some economists predict inflation will slow or even disappear due to the Fed's interest rate increases. But this is an incorrect assumption, since inflation tends to be an ongoing problem.

It is true that the Fed has raised its benchmark interest rate seven times this year and indicated it will keep increasing them. But this won't put an end to inflation because central banks have a dual mandate: they promote high employment and output while keeping prices stable.

That makes it challenging for the Fed to slow its rate-hiking cycle, especially when faced with persistent issues like supply chain disruptions and rising global trade tensions. For instance, Russia's invasion of Ukraine combined with China's COVID lockdowns have put undue strain on supply chains and driven up prices.

Other factors can exacerbate price pressures, such as climate change which reduces crop production and drives up food prices. These issues are especially challenging for emerging markets which rely heavily on commodity exports to power their economies.

Another factor is labor shortages, as older baby boomers begin to retire and younger workers cannot keep up with demand. This poses a real concern for central bankers since inflation could rise significantly and create social unrest.

Many economists anticipate this current period of high inflation may last decades, as worker shortages are an enduring issue that won't go away anytime soon. As a result, inflation could become even more widespread in the future.

2. The Fed isn’t easing up

On Wednesday, Fed Chairman Jerome Powell indicated only one more rate hike this year despite recent data showing inflation and job growth slowing. This came as a disappointment to investors who had been watching with interest as the Fed has moved cautiously to control inflation and raise rates.

In his testimony before the Senate Banking Committee, Powell acknowledged that the Fed's battle to bring inflation back down to their 2% goal is far from over and likely to be bumpy. This makes it challenging for them to achieve their dual mandate of stable prices and full employment.

Powell stressed the necessity for the Fed to maintain inflation at a low level in order to avert potential risks from high prices that could stifle economic activity and prevent businesses from investing capital effectively. A high inflation rate also makes it costly for businesses to hire personnel and pay them fairly.

That could create a vicious cycle of high prices that could hinder business investment and increase unemployment - both bad for consumers. Yet there are signs that prices may be beginning to moderate, particularly in core services sectors such as housing and health care.

Brainard predicted that current trends should help lower inflation over the coming months. She also pointed out several potential reductions in prices for goods like used cars and furniture as well as energy.

Though inflation is unlikely to dip below the Fed's 2% target any time soon, inflation has come down from its postpandemic high - which is encouraging news for policymakers.

But a lower inflation rate also implies higher interest rates, which could hurt Americans by cutting into their purchasing power. That is why some analysts anticipate the Fed will hold off on further rate increases soon, giving markets and the banking sector more time to adjust.

Some economists predict the Fed will raise rates in March, then take a break in May before resumeing its normal rate-hiking cycle in October. This would give them time to assess how successful their policy is without sparking inflation or plunging the economy into recession.

3. The economy isn’t growing

Due to runaway inflation and Fed rate hikes, the economy has not been growing at a meaningful pace. Economists surveyed by FactSet anticipate GDP will show only slight expansion in the third quarter - not enough for it to qualify as a recession yet, but still weak enough that investors are worried.

The major concern is that higher borrowing costs will deter consumers from spending, potentially hindering economic growth. Already, businesses have begun to feel the pinch - either retrenching on new purchases or shrinking inventories.

Furthermore, concerns that banks might not be able to make loans are impacting the market. PacWest, a Los Angeles-based bank under pressure, announced Wednesday that it would use emergency capital in an attempt to save its balance sheet. This move sent many regional lenders' stock prices tumbling.

Powell stressed the strength and stability of the banking system, but cautioned that higher interest rates could cause more banks to reduce lending in an effort to conserve cash, potentially slowing growth and hiring activities.

In his address to investors, Powell made it abundantly clear that the Fed is not yet done with its battle against high inflation. He described it as "a long process" and stated that they aim to get inflation back down to their 2% target before they cease raising rates.

Some economists speculate that the central bank may need to raise interest rates again before accomplishing its goal of controlling high prices. Therefore, investors may have to wait until March's Fed meeting before learning if the central bank plans on ending its hikes.

It's a delicate balance for the Fed, which must try to contain inflation while also dealing with the effects of the banking crisis. Investors will be watching for comments from Fed Chairman Jerome Powell this week when he speaks at the Economic Club of Washington.

If Powell sticks with his plans from December, then the Fed will likely raise its key rate at least once more this year. That could send bond yields up and stocks down; however, if Powell indicates he may reduce rate hikes in 2019, that could be beneficial for investors.

4. The Fed doesn’t want to end its rate-hiking cycle

After a year of raising rates to combat inflation and jump-start the economy, the Fed is facing a test that will determine whether it will maintain its current strategy. Inflation has reached its 40-year high, making it increasingly difficult for them to defeat inflation without inducing an economic downturn.

The Federal Reserve has a long-standing tradition of raising interest rates to control inflation, though not in this manner since the 1980s. When interest rate hikes reached this level in 2003, inflation still fell short of their two percent target set by the Fed.

Analysts still believe the Fed should maintain credit tightening to prevent inflation from rising too far. But they caution that doing so could exacerbate the bank crisis and plunge the economy into a recession.

Analysts from the Canadian Imperial Bank of Commerce and BMO Economics believe the Fed will increase its rate-hiking cycle in order to guide the economy into a "soft landing." However, they also point out that inflation remains well above their two percent target, suggesting further quantitative tightening may not have as much of an effect as anticipated.

At its March meeting, the Fed raised rates by a quarter point - its ninth increase since beginning to raise them a year ago. It anticipates raising rates twice more this year before taking a break for the remainder of 2018.

On Wednesday, Fed Chairman Jerome Powell indicated the central bank may soon end its rate-hiking cycle due to strong economic conditions and lower inflation. He dismissed any worries of excessive credit tightening that could spark a recession.

He noted that some banks may reduce their lending pace, which would be the equivalent of a quarter-point hike, as businesses try to escape the stress of rising interest rates. He predicted this could slow the economy and further justify further rate increases.

The market reacted negatively to this news, with stocks declining as the benchmark stock index dropped 2.4% on average. Shares of technology companies, which tend to become less appealing when borrowing costs increase, were particularly hard hit - among them Apple, Cisco Systems and Microsoft.