Nomura's chief macro strategist, Naka Matsuzawa, posits that the Federal Reserve's June policy meeting may, in hindsight, be viewed as a once-in-a-decade inflection point, signaling a turn in the credit cycle and the beginning of the end for the AI boom.

In a recent weekly macro strategy report, Matsuzawa noted that markets are currently overestimating the risk of Fed rate hikes this year, while severely underestimating the risks associated with the longer-term interest rate trajectory.

He cautions that what the market and the Fed have jointly characterized as a "precautionary" one or two rate hikes carries a material risk of evolving into a systematic tightening cycle. Such a development would have profound repercussions for the credit cycle.

The core of this assessment lies in Matsuzawa's expectation that AI-related investment and the resulting productivity gains will drive economic growth and inflation beyond the Fed's projections. Should this scenario materialize, the yield on the 10-year U.S. Treasury note could surge significantly past 5%.

FOMC Signals Not Fully Priced In

Matsuzawa points out that the market has yet to fully digest the messages from the latest FOMC meeting, which is somewhat unsurprising.

This is partly because the most crucial FOMC member, new Chair Wash, has spoken very little so far and did not submit his own interest rate forecast in the dot plot. Matsuzawa focuses on two key aspects:

First, the urgency and trigger conditions for a Fed rate hike.

Second, the actual likelihood of the Fed initiating a rate hike.

He judges that the market is overestimating the former, while the underestimation of the latter is even more concerning.

Matsuzawa anticipates that upcoming speeches from Fed officials with neutral-to-dovish leanings, such as Christopher Waller and John Williams, will help alleviate market anxieties about the urgency of a rate hike this year.

However, on the more critical issue of the depth and duration of the rate hike path, no new substantive information is expected soon. The next significant test will be the U.S. employment data release on July 2nd.

Contradictions in the Dot Plot: Can the "Insurance Hike" Framework Hold?

The median projection in the latest FOMC dot plot indicates one rate hike in 2026, followed by one rate cut each in 2027 and 2028.

This path raises a logical question: if the Fed plans to cut rates in the future, why hike now?

Matsuzawa interprets this as suggesting that members advocating for a hike this year (likely primarily regional Fed presidents) are framing it as a purely "insurance operation."

The logic is that one preemptive hike is sufficient to prevent the economy and inflation from overheating, while factors like stable oil prices will eventually create room for rate cuts back towards the neutral rate of 3.1%.

Supporting this mild framework are the meeting's economic projections:

GDP growth forecasts for 2026 to 2028 are 2.2%, 2.3%, and 2.2%, showing almost no change.

Unemployment rate projections are 4.3%, 4.3%, and 4.2%, only barely reaching the full employment level (4.2%) by 2028.

The lower bound of the 2028 unemployment rate forecast is 4.0%, implying that almost no member is concerned about the risk of economic and inflationary overheating.

Matsuzawa believes the Fed will hold steady in 2026. He argues that once Chair Wash's policy stance becomes clearer or inflation expectations stabilize (e.g., with a further decline in oil prices), the current market pricing of roughly 1.5 hikes this year could be quickly revised or even disappear.

The Major Risk: Precautionary Hikes Sliding into a Substantive Tightening Cycle

However, Matsuzawa holds a starkly different view on the longer-term path. He is skeptical of the Fed's consensus assumption that the economy and inflation will not overheat before 2026.

The report notes that the continued expansion of AI-related investment and AI's boost to productivity (i.e., increased real income) will accelerate economic growth and inflation beyond Fed expectations.

Should this scenario unfold, the Fed would not stop at one or two insurance hikes but would be forced into a conventional tightening cycle to suppress an overheating economy and inflation, or the market would preemptively price in this path.

Historical data provides a reference: during the most recent 2022-2023 hiking cycle, the 2-year real yield, which reflects policy rate expectations, once exceeded 3.0%, only retreating after the SVB shock triggered financial turmoil and an economic slowdown.

Currently, the 2-year real yield is around 2.00%, indicating the Fed has at least another 100 basis points of hiking room. Matsuzawa warns that if this scenario truly materializes, the 10-year U.S. Treasury yield would very likely far exceed 5.00%.

The Credit Cycle Significance of a "Once-in-a-Decade Turning Point"

In the report, Naka Matsuzawa puts forward a broader structural proposition: looking back, this FOMC meeting may prove to be a "once-in-a-decade game changer," marking the beginning of the end for the AI boom credit cycle.

His core logic is that the AI boom will not end naturally; only the Fed actually starting to hike rates can end it.

From another perspective of the credit cycle, the end of the AI boom also means the bond market will "discover the true neutral rate" and break free from its structural downtrend.

Although the market has already priced in a rate hike timing earlier than Matsuzawa's previous expectations, the shape of the rate path (first up, then down, ultimately returning nearly to the starting point) indicates the market still views this hiking cycle as a one-off, precautionary operation.

If this judgment is mistaken, the entire logic of the credit cycle's evolution would be completely rewritten.