September FOMC Review and USD/JPY

■ Federal Reserve Chairman Powell explained that the rate cut was precautionary, signaling caution against cutting rates too quickly.  
■ The US dollar is weakening slowly, and the Japanese yen is strengthening gradually. Even if USD/JPY drops below 145, it will take time to reach the lows seen at the start of the year. 
 
    The Federal Open Market Committee (FOMC) decided to cut interest rates by 0.25% at its meetings on the 16th and 17th, bringing the policy rate to a range of 4.00% to 4.25%. This was the first rate cut since December of last year, after six meetings. However, Governor Milan, who took office on the 16th, advocated for a larger 0.5% cut. The statement noted that uncertainty around the economic outlook remains high and highlighted that "risks to our two mandates (maximum employment and price stability) are being closely monitored, with the view that downside risks to employment have increased." Regarding the policy decision, Fed Chairman Powell called it a "risk-management rate cut." He explained that tariff-related price hikes are likely temporary. Future policy moves will be decided on a meeting-by-meeting basis, and he reiterated that the central bank will continue to rely on economic data. 
 
    Based on the latest summary of economic projections from FOMC participants, economic growth is expected to rise by 0.2 percentage points in both 2025 and 2026, and by 0.1 percentage point in 2027. The unemployment rate is forecasted to stay steady at 4.5% through 2025, with downward revisions of 0.1 percentage points for 2026 and 2027. The personal consumption expenditures (PCE) deflator is projected to stay at 3.0% in 2025, then decrease to 2.6% in 2026 and further to 2.1% in 2027. The median forecast for the policy rate (dot plot) suggests a reduction from 3.9% to 3.6% by the end of 2025, with a 0.25 percentage point cut expected in October and December. A further 0.25% cut is forecasted for 2026 (3.4%) and 2027 (3.1%), with a new forecast for 2028 at 3.1% and the long-term rate remaining at 3.0%. 
 
    The US dollar rebounded sharply as Federal Reserve Chairman Powell tempered market expectations for a significant rate cut. The US dollar index slightly recovered after hitting its lowest since February 2022. Ahead of tomorrow’s concluding Bank of Japan monetary policy meeting and the October 4th Liberal Democratic Party presidential election, the market remains cautious about yen selling pressure due to delayed rate hikes and increased fiscal spending. However, because the US-Japan interest rate differential may narrow, upward pressure on the US dollar is limited, and the weakening dollar and strengthening yen are likely to proceed slowly. Even if USD/JPY falls below the key 145-yen level, it will take time to reach the year-to-date low of 139.86 from April.