While holding the target federal funds rate steady, the U.S. Fed Chair Jay Powell signaled a clear end to the rate hike cycle. Powell mentioned that the benchmark rate was now likely at or near its peak for this tightening cycle. Powell’s comments also suggested that the Fed is willing to cut rates before inflation drops to 2% and not make the mistake of over restricting the economy.
Headline CPI in the U.S. has been moderating over the last two months (3.1% in Nov’23 vs 3.2% in Oct’23) compared to previous year’s peak of 8.9% in Jun’22. Core inflation though falling, is still ~4%. As per the latest FOMC projections, PCE inflation is projected to return to its 2% acceptance level by 2026. Economic activity has been showing resilience amidst two years of tightening, with real GDP registering a growth at 5.2% in Q3 2023 compared to 4.9% in Q2 2023. Fed chair acknowledged the progress on easing inflation over the last few months, with limited impact on economic growth.
Global and domestic markets have reacted positively to the latest comments by the Fed Chairman. Benchmark U.S. 10- year treasury yields moderated by 3.8% closing at 4.04%, while the 10-year G-Sec in India moderated by 0.5% opening at 7.22%.