Our core view on US macros this year has been that upside risks to inflation were being overstated while downside risks to employment were underestimated. Fed officials remain more concerned about persistent above-target inflation than we are, but recent data have convinced Powell and the committee to resume returning rates to neutral. We expect the perceived balance of risks to continue to shift dovish, keeping officials cutting policy rates 25bp at each of the next four meetings. The risk is that policymakers decide either neutral is lower or that rates need to be accommodative, leading policy rates to decline below 3%. Despite the dovish revision to the expected rate path, economic projections were surprisingly hawkish. This suggests a low threshold for delivering additional insurance cuts in the near term and less vigilance on inflation risks. Less emphasis on inflation risks and a likely shift in Fed leadership next year leads us to forecast terminal rate below 3% by mid CY26. We believe the majority of Fed are yet to admit that their inflation expectations for most of CY25 was higher than actuals. For the same reason, the core PCE of CY26 was again revised higher where as it should be lower in our view if we agree that tariff shock is a one-time price effect. In addition, base effects will bring CY26’s core PCE lower than CY’25 core PCE. Hence, we continue to believe front loaded 25bps rate cuts for each of the next 4 meetings. In BOJ, more of the same status quo continued except for a new announcement of a 100year plan of selling ETFs & J-REITs. While the start date for the sales is yet to be determined, the BoJ plans to sell approximately JPY 330 billion (at book value) of ETFs and JPY 5 billion (at book value) of J-REITs annually. However, the pace of sales may be reviewed in the future. As of September 10, the BoJ's holdings of ETFs and J-REITs at book value stood at JPY 37.1862 trillion and JPY 655 billion, respectively. This implies that it would take 113 years to complete the sale of ETFs and 131 years for J-REITs. Also, Tamura and Takata each submitted a proposal for a rate hike to 0.75%. Since the new BoJ Law came into effect in 1998, there have been three instances when some of the policy board members have proposed a rate hike, which was subsequently voted down: July 2000, January 2007, and December 2024. In all these cases, a rate hike was decided at the subsequent meeting. We continue to believe BOJ is far behind the curve and should ideally by 50 bps higher at current levels of output and inflation. While the LDP presidential election on October 4 could also be a hurdle, we now believe it is no longer as high a hurdle, given that the BoJ has demonstrated courage to decide on ETF sales before the presidential election. We believe BOJ will hike by 25 bps in it’s Oct meeting as well as 50 bps in CY26.
