"We're aware of the risk that we would hang on too long. We're very focused on not making that mistake."

That was Federal Reserve Chair Jerome Powell signalling an end to the most aggressive rate-hiking campaign in years and that the Fed could cut rates by as much as 75 basis points in 2024.

"There's a general expectation that this will be a topic for us, looking ahead. That's really what happened in today's meeting," Powell told the media about his colleagues at the Federal Open Market Committee mainly discussing rate cuts at their Dec 12-13 meeting, the last one for 2023.

Powell's comments mark a notable U-turn. Just earlier this month, he attempted to ward off talk of rate cuts.

The Fed's December meeting is a victory for the markets, which have been betting big on interest rate cuts from the US central bank despite assertions to the contrary from the Fed.

The 10-year yield, which had breached 5⁒ in October, has dropped almost 100 basis points in the run-up to the FOMC meeting, with markets being convinced the Fed will start cutting rates sooner rather than later.

This would be a case of a staring-down match, the markets have beaten the Fed for a win.

The markets would also, without hesitation, give the Fed a win for bringing down inflation towards its targets without causing a deep recession.

KEY TAKEAWAYS

At its last meeting of 2023 late on Wednesday, the FOMC voted unanimously to leave the target range for Federal Funds at 5.25-5.50⁒ for the third such meeting. At 5.25-5.50⁒, the Fed rate is at its highest in over 20 years.

The rate-setting committee diluted its stance by saying officials will consider the extent of "any" additional policy firming that's needed. The word "any" was not there in the previous statements.

But the clincher of things to come was from the Summary of Economic Projections, the document accompanying the FOMC statement.

The "dot plot" of rate projections shows the median of expectations of Fed officials showed 75 basis points rate cut was on the cards in 2024. Eight officials expected fewer cuts, but five expected even deeper cuts.

The Fed also acknowledged that inflation has eased over the past year, but remains elevated. It also said that economic growth has slowed from the strong pace of the July-September quarter.

Fed officials projected that inflation would continue to fall in 2024 and 2025. They expected core inflation of 2.4⁒ at the end of 2024, down from the 2.6⁒ projection made in September.

Their unemployment forecasts were only a little changed, indicating that Fed officials expect inflation to come to target without any serious job losses.

In other words, the Fed is expecting a successful soft landing.

INDIA IMPLICATIONS

Until Wednesday, the Fed and other central banks, including the Reserve Bank of India, have been sounding hawkish due to concerns that any dovish signals could prompt the markets to price in rate cuts, which could prematurely dilute the tightening efforts.

In other words, the central banks were signalling more rate hikes, although they were probably nearly done with them.

The RBI did sound hawkish at its Monetary Policy Review on Dec 8, although it did take the hawkishness a notch down when Governor Shaktikanta Das said the central banks must avoid overtightening.

It is a well-acknowledged expectation that the RBI will not cut interest rates if the Fed is not cutting them to ensure that the rate gap between India and the US does not drop any more than it has already.

The RBI had raised interest rates by 250 basis points in 2022-23. The Fed has raised rates by 525 basis points in this cycle.

After the latest FOMC meeting, Indian markets too would start to price in rates cuts by the RBI. It is, however, well regarded that the Fed's rate cuts may be a necessary condition but not a sufficient one for rate eases at home.

The RBI Governor has indicated an important condition for changing the stance of the monetary policy, which reads "withdrawal of accommodation while supporting growth". He had said inflation must hit the targeted 4⁒ and stay there durably.

"It would be wrong to assume that any kind of loosening et cetera is around the corner", Governor Das told the media on Dec 8.

"That (loosening) is not on the table at the moment. Let me be very clear. It is not at all on the table. Look at the inflation numbers; look at the inflation trajectory. So, we still have a distance to cover."

But as the U-Turn of Powell demonstrated, it is unlikely Das will not resort to a U-Turn of his own.

Das may not be as hardnosed as he is now about inflation hitting the 4⁒ mark, durably or not. If the inflation momentum eases and the rate appears to be nearing 4⁒, the RBI may be amenable to rate cuts.

The Fed may have projected 75 basis point cuts in 2024 and another percentage point cut in 2025 However, since RBI moved slower in its hiking pace compared to the Fed, it may follow a similar move in lowering the policy rates in the coming year.

It may not have to.

India's economy is projected to grow at a healthy rate, obviating the need for deeper rate cuts. Moreover, the RBI would want to have an interest rate regime that benefits savers as much as it does the borrowers.

The fall in India's savings rate has been a concern for many.

But come April, the RBI Governor, too, could signal: higher no longer!