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Below The FOMC Review by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services.

* The market has been looking for a dovish pivot from the Fed, and yesterday it got that. The FOMC statement eased back the language on further hikes, the dots now show three cuts next year, and the post-meeting statement now acknowledges inflation has eased. Chair Powell’s comments at the presser supported this dovish turn, stressing progress on inflation and labor market balance. While he maintained that the Committee is not yet convinced it is done, he conceded that the conversation will soon transition to discussing less restrictive policy. When asked in the presser, Powell did not indicate concern with easing financial conditions or sticky services inflation.

* The 50bps downward revision in 2024 dot plot vs Sep’23 was led by revised economic projections, which indicate a large majority of the Committee is comfortable with multiple cuts next year even though growth is expected to be only modestly below trend. The 2025 median dot also took out a hike.

* Inflation risks are still seen as skewed to the upside, though by the lowest since early ’21. Core PCE inflation for this year was revised down 0.5pp to 3.2% and for next year down 0.2pp to 2.4%. The GDP projections were upgraded for this year, though expected to moderate to 1.4% next year. That said, when seen in the light of what was expected last December, the actual and Fed’s expected outcome for end-2023 is remarkable – a higher-than- expected GDP, and lower unemployment and yet lower-than-initially-projected core inflation (see table 1).

* Powell ensured to express his satisfaction with the “progress” on the immaculate disinflation – the word made repeated mentions, though he mentioned that it was too soon to declare victory. More dovishly, in his presser he acknowledged that the FOMC is already talking about “dialing back the amount of policy restraint in place.”

* Consequent to the dovish outturn, USTs staged an enormous bull-steepening, with 2Y USTs rallying by 30bps - the largest since March, while the 10Y also fell by 18bps to close just above 4%. Deeper rate cut pricing also drove USD weaker.

* Market pricing for near-term cuts has moved up materially post FOMC, with markets frontloading rate cuts into early 2024. We do not necessarily agree with the current aggressive pricing. However, if “totality” of data continues to cool and support their narrative, we think the Fed could fairly soon start laying the groundwork for normalization to begin early 2H24.

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