Memorandum: Is it true that the US economy is fine despite rising interest rates because it is performing well?

The conclusion is that “it is half true, but the premise has weakened since mid-September.”

Facts regarding interest rates

On September 16, 2026, the Federal Reserve raised the policy interest rate for the first time in over three years since July 2023. The background includes a recovery in employment in August, inflation exceeding the 2% target, and high energy prices. The target range is 3.75–4.00%. Since this is still lower than the 2023 peak of 5.25–5.5%, while “rising” is correct in terms of direction, it cannot be said that the tightening is deep.

The content of “performing well” looks different depending on the indicators

• Employment: Non-farm payrolls in September were +29,000, falling below the market expectation of +90,000. The figures for July and August were also revised downward by a total of 60,000, and the three-month moving average is +51,000. However, although the unemployment rate rose to 4.2%, the factor was an improvement in labor supply, and some evaluate the employment environment as solid when averaged out.

• Industry: While domestic demand-related sectors such as healthcare and construction are providing support, layoffs are progressing in finance and IT, which are affected by AI and structural reforms, leading to polarization.

• Prices: Reports as of June indicated an inflation rate of over 4%, with the US-Iran conflict in the background of high crude oil prices. On the other hand, the wage growth rate is on a decelerating trend, and it is not seen as a situation where the employment environment is increasing inflationary pressure. In other words, high prices seem more likely to be energy-driven rather than caused by overheating demand.

In summary, it is closer to a state where “employment is slowing down but not collapsing, and prices are high due to external factors” rather than a “strong economy that can withstand interest rate hikes.”

Looking at it on a timeline

The basis for the interest rate hike was the strong employment statistics in August. The subsequent September statistics were weak, and it is believed that the possibility of an additional interest rate hike in October has receded. The next FOMC is on October 28. “It’s fine because it’s performing well” held up as a premise in mid-September, but the basis is now thinning.

Reasons why my assessment is wavering

• Data is thin: I have not been able to confirm the latest values for GDP, personal consumption, long-term interest rates, and stock prices this time. There is not enough to make a comprehensive judgment on “performing well.”

• There are multiple frameworks: If high prices are energy-driven and temporary, the interest rate hike might be excessive. If inflation is starting to take hold, the interest rate hike is appropriate. The meaning of “fine” is reversed between these two, and it cannot be decided with the current data.

I will check the latest status of long-term interest rates, personal consumption, and corporate earnings.

I searched the web

The biggest change in perspective since last time is long-term interest rates. Upon re-investigation, the previous statement that “tightening is not yet deep” was only when looking at the policy interest rate.

1. Long-term interest rates have moved far ahead of policy interest rates

The US 10-year Treasury yield rose to the 5.36% level at one point on October 7, reaching its highest level since April 2002. The factors are the persistence of high crude oil prices and price vigilance due to the robustness of the economy. Since the policy interest rate is 3.75–4.00%, long-term rates are more than 1.3 points above the policy interest rate. kumanichi

• The movement where long-term rates rise significantly more than short-term rates is not so much a precursor to a recession, but rather a form of the market adding a premium for inflation and fiscal concerns.

• In the 10-year Treasury auction on the same day, the strength of demand, mainly from overseas, was demonstrated, and the yield narrowed its gains. It is not a situation where there are no buyers. kumanichi

• This is also spreading to Japan. The yield on the 10-year Japanese government bond temporarily reached 3.115% on September 25, the highest level in about 30 years. kumanichi

Since I have only confirmed reports up to October 8, the movements of the most recent week remain unverified.

2. Demand side is strong, but household sentiment is weakening first

• Results: In the April-June quarter GDP, personal consumption (+3.4% annualized) and capital investment (+8.5%) were revised upward. The final figure on September 30 was 2.2% annualized, revised upward from the 1.5% in the second estimate. dlribloomingbit

• However: The same report points out that price indicators were also revised upward, and there is a downside risk due to the prolonged period of high interest rates. dlri

• Sentiment: Consumer confidence in August fell to 89.4, and the expectations index deteriorated significantly. Confidence in September also fell below expectations, and the number of job openings did not meet expectations either. dlrioanda

GDP is a past figure for the April-June quarter, while confidence and job openings are the most recent figures. It is necessary to be cautious that the basis for being “in good shape” is skewed toward the past.

3. Companies and stocks are adjusting, but have not collapsed

• Stock prices: The Dow was in the $52,000 range on September 15, but fell to the $50,900 range on September 30, marking three consecutive days of decline. The drop was about 2%, and the rise in long-term interest rates is becoming a burden. oandaoanda

• Earnings: Expectations for third-quarter earnings are strong, and the profit growth outlook for S&P 500 companies remains solid. The focus is on whether strong earnings can offset the downward pressure from high interest rates. paypay-sec

Stock prices are being pressured by interest rates, but no deterioration in corporate earnings has been confirmed. The structure where interest rates rise first while earnings are not yet bad is similar to the early stages of the 2022 rate hikes.

4. How can we say it is “fine” with this?

“Doing well despite rate hikes” is a fact regarding actual demand at this moment. However, considering the following three points, we cannot definitively say “therefore it is fine.”

• Time lag: The impact of long-term interest rates reaching the 5% range (mortgages, equipment funds, refinancing) will take effect from here on out. It has not yet sufficiently appeared in the GDP figures.

• Prices: If prices remain high while demand stays strong, the Fed cannot move to cut interest rates. The strength itself keeps interest rates high.

• Current slowdown: A slowdown in employment, a decline in confidence, and a stock market correction are all occurring simultaneously.

Reasons for wavering confidence

This time, the main cause is not the thinness of the data, but the plurality of frameworks.

• Multiple frameworks: There is a view that high interest rates will cause a slowdown with a time lag, and a view that structural demand such as AI investment can withstand interest rates; current figures are consistent with both.

• Areas with thin data: We have not yet confirmed the actual personal consumption (on an expenditure basis) since August, nor the details of earnings (as announcements have only just begun).

The immediate factors for judgment are the three points of the October 28 FOMC, the contents of the third-quarter earnings, and whether the 10-year Treasury yield will settle in the 5% range.