How to interpret the FOMC's pause: Focusing on the duration of high interest rates in December

The U.S. Federal Reserve (Fed) held the policy interest rate steady at 3.75–4.00% at the FOMC meeting on October 27–28. While this pause follows a 0.25% hike in September, it cannot be inferred from this decision that vigilance against inflation has receded. Looking ahead to the December meeting, the key considerations are the possibility of additional rate hikes and the duration for which high interest rates will persist.

What stands out in this statement is the change in the assessment of the economy. The pace of expansion in economic activity was upgraded from “solid” in September to “strong.” The vote was 10 to 2, with Governor Cook and Cleveland Fed President Hammack dissenting in favor of a 0.25% rate hike. While the rate was held steady, the economic assessment has strengthened, and there are voices calling for further tightening.

So, why was the interest rate not moved this time? The statement explains that the accumulation of additional information will be useful for making appropriate policy decisions. This suggests a stance of gathering more evidence before the next move. It is likely that opinions are divided between the need to act quickly on rate hikes and the need to carefully assess the burden on the economy.

In this context, how the strength of the economy is interpreted is crucial. If the expansion in consumption and investment exceeds supply capacity, inflationary pressure will intensify. On the other hand, if supply capacity is also increasing due to productivity gains, there is room for both strong growth and slowing inflation to coexist. Given that the statement also touches on productivity growth, the necessity of rate hikes cannot be judged solely by the level of growth.

Statistics released after the meeting also added material to this assessment. The September PCE price index released on October 29 rose 3.6% year-on-year, while the core index, excluding food and energy, rose 3.1%. Meanwhile, real personal consumption, excluding price fluctuations, was almost flat month-on-month. The result shows persistent high prices alongside stagnant consumption. However, it is necessary to judge based on future statistics rather than drawing conclusions from a single month’s figures.

At the FOMC meeting on December 8–9, in addition to prices and employment, I will be paying attention to the updated economic and policy interest rate projections. Regarding prices, I will confirm the spread of upward pressure not only through the headline index but also through core and service prices. Regarding employment, I will examine whether the resilience of the economy is continuing by looking at the unemployment rate and wage trends in addition to changes in the number of employed persons.

The policy interest rate projections offer clues for thinking about December. The median participant forecast as of September was 4.1% for both the end of 2026 and the end of 2027. The level at the end of 2026 is consistent with a scenario where the current rate is raised by another 0.25% before the end of the year.

What I am particularly interested in is the outlook for the end of 2027. Whether the Fed indicates a path of lowering rates after a December hike or maintaining a high level will change the time horizon of the interest rate burden faced by companies and households. By comparing the policy rate and price projections, we can see how much time and tightening the Fed believes is necessary to bring inflation under control.

This time horizon is also important for Japan. If high U.S. interest rates persist, it will affect dollar-denominated financing costs and the outlook for the interest rate differential between Japan and the U.S. At the December meeting, by following not only the interest rate change on the day but also how the policy path for the following year and beyond changes, it will become easier to consider the impact on Japanese companies.