Investors are placing a big anti-inflation bet this year on stocks that, according to Wolfe Research, may not materialize. The S&P 500 is up nearly 5% this year, a move that comes as markets look to the end of the Federal Reserve’s interest rate hikes, which were implemented to control inflation. With market prices suggesting that the Fed is likely to raise its lending rate another half percentage point or more, investors have become more comfortable with owning stocks. Fed fund futures are even anticipating some mild rate cuts towards the end of 2023, according to data from the CME Group. Analysts at Wolfe say this could be a mistake, as Fed Chairman Jerome Powell and other policymakers have vowed to be vigilant until they are convinced that inflation is falling. “We also believe that the market is massively underestimating the Fed chairman’s desire to avoid a resurgence of 1970s-style inflation,” the company said in a note from a client. “We expect Powell to disappoint the markets by maintaining an aggressive tone during his February 1 press conference.” In the 1970s, the central bank raised interest rates to control inflation, but only cut them when there were signs of economic weakness. That led to more draconian increases in the early 1980s that pushed the economy into a double recession. Multiple Fed officials have vowed not to repeat those mistakes. Markets essentially assign a 100% probability for the Fed to raise its fund rate by 0.25 percentage points on January 31-February. 1 meeting of the Federal Open Market Committee. Futures prices point to another quarter-point increase in March before the Fed pauses to assess the impact rate hikes have had on inflation and the wider economy, particularly the labor market. That second-quarter-point hike would raise the funds rate to a target range of 4.75%-5%, the highest level since October 2007. An aggressive round of tightening in 2022 coincided with the S&P 500 falling nearly 20%. Rate hikes by the Fed essentially work by tightening financial conditions, of which stock prices are an important part. So a rising market indicates that investors see an easier Fed coming. Prices are rising despite widespread expectations that the economy will enter a recession sometime this year. “We attribute the recent sharp ‘risk on’ rally largely to the market viewing near-term economic weakness and looking to the next Fed cut cycle – even though the current walking cycle is not over!” wrote the Wolfe team. While several Fed officials have confirmed in recent days that they expect the level of rate hikes to narrow, they also said they don’t expect rate cuts until at least 2023. could avoid a deep recession as inflation eases rapidly, allowing the Fed to end the cycle of rate hikes soon and even implement rate cuts later in the year,” DataTrek Research co-founder Nicholas Colas said in his note from Monday evening. “Counterpoint: History also shows that the Fed cuts policy rates most often during recessions … and very little about the US economy says ‘recession’ right now.” Markets will get a better picture of the economy on Thursday when the fourth quarter gross domestic product data will be released. The central bank will also see another key data point ahead of its next meeting, the personal consumption expenditure price indexes, which will be released on Friday. Core PCE is the preferred inflation measure of the Fed. – CNBC’s Michael Bloom contributed to this report.