US: Revises Policy Rate Outlook After Signaling a Pause in Rate Cuts

■ The December FOMC hinted at a pause in rate cuts, with cuts temporarily shelved as long as inflation and employment move as expected.  

■ However, under the next Fed Chair, rate cuts are expected to resume and may even fall to the neutral rate before the midterm elections. 
 
   At the Federal Open Market Committee (FOMC) meeting held on December 9th and 10th, the wording regarding policy guidance in the statement was revised to "In considering whether, to what extent, and when to make further adjustments to the target range for the policy rate, the Committee will carefully assess future information, the economic outlook, and the balance of risks." This shift explicitly includes "timing" in the consideration, compared to the previous emphasis on only the "degree." A similar statement appeared in the FOMC statement on December 17th and 18th, 2024, just before the pause in rate cuts began in January 2025. Therefore, this can be interpreted as an indication that a pause in rate cuts will begin at the next FOMC meeting. The "risk management-driven rate cuts" that have been repeatedly cited as a primary reason since September concluded in December. Going forward, policy decisions are expected to be based more on economic data and the outlook, following the guidance outlined in the statement. As long as inflation and employment follow the path depicted in the December Summary of Economic Projections (SEP), rate cuts are likely to be temporarily shelved. 
 
   However, the median forecast for the long-run policy rate by SEP participants remained unchanged, which can still be interpreted as the Fed's basic policy stance of gradually lowering the policy rate to 3.00% in the medium term remaining unchanged. The biggest uncertainty facing monetary policy in 2026 lies in the change of Fed Chair: Chairman Powell's term expires on May 15th, and a new Fed Chair is expected to be nominated at the beginning of the new year, according to the US government's intentions. There is no guarantee that the policy direction shown in the December FOMC will continue after the new chair takes office. The market generally expects that from the June FOMC onwards, the policy stance may reflect the government's intentions and shift towards a more accommodative direction. 

 
   We had previously expected the policy rate to continue to decline to 3.00%, but based on factors such as the FOMC's revision of policy guidance in December, we have adjusted our outlook for the policy rate. The new forecast assumes that the policy rate will remain unchanged in the 3.50–3.75% range during Chairman Powell's term, i.e., until the FOMC meetings on April 28 and 29, 2026. Rate cuts will resume in June following the change in Fed chair, and are expected to reach 3.00% in September. Given the US midterm elections in November, the political motivation to lower the policy rate to the neutral level of 3.00% before the elections is likely to increase. We assume that under the new chair, there will be a 0.25% rate cut each in June, July, and September. This outlook assumes a "soft landing" for the US economy; if the economy falls into recession, the policy rate may be lowered below 3.00%, but no such signs have been observed so far. Upside risks to the outlook include the Tax Cuts and Jobs Act (TCJA) passed in December of last year, which is expected to return more than $1,000 in taxes to individuals on average by 2026. If this leads to an overheated economy or a resurgence of inflation, the resumption of interest rate cuts may be forced to be postponed.