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Below perspective on The FOMC Meeting by Ms. Madhavi Arora, Lead Economist, Emkay Global Financial Services 

“ As widely expected, the Fed unanimously kept rates on hold, retaining its guidance for potential “additional policy firming.” However, the policy message is becoming “more two-sided.” The statement did add that “financial” as well as credit conditions should weigh on the outlook, and in his presser, Chair Powell acknowledged the Fed is monitoring how long tighter conditions might persist. Owing to this, yields fell and stocks rose while USD weakened too. Powell also avowed that the Fed could afford to be more careful given how much policy has tightened already, but noted the debate going forward is whether the data would confirm that the current stance is sufficiently restrictive to sustainably return inflation to the Fed’s 2% target. He thus left open the door for additional rate hikes even though he didn’t defend the Sept Dot plot which implies one more hike in Dec. We continue to think that the Fed is done hiking.

Powell sounded quite pleased with the effort to bring down inflation, where he saw “pretty significant progress.” He sounded optimistic that fading pandemic distortions and rising labor supply (notably from immigration) could help this process—although Powell noted that he, like most of the FOMC, still believes some further softening of the labor market and slowing of growth will be necessary .While we continue to see Fed on hold in December and through the first half of next year, we think the UST bear steepening would find some solace as Fed’s tone gets softer. However, the rising term premium will likely be the next structural driver of higher yields in coming years.

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