Fed Preview: Of rate cuts and shutdowns

The US Federal Reserve (Fed) is set to decide on policy interest rates amid a government shutdown, elevated price increases, and a weak jobs market.

With uncertainties and gaps in data caused by the US government shutdown, Metrobank expects the federal funds rate (FFR) to be cut by 25 basis points at the October 28–29 Federal Open Market Committee meeting.

Tariff-fed inflation

The Fed’s preferred inflation gauge, Core Personal Consumption Expenditures (PCE), remained elevated at 2.9% in August, maintaining its pace in July. Headline PCE also accelerated to 2.7%, from 2.6% in the preceding month.

The recent uptick in PCE is driven by persistent services inflation and price increases of select goods, reflecting the pass-through effects of US President Donald Trump’s tariffs.

Meanwhile, the release of other indicators of inflation, like the Consumer Price Index (CPI) and the Core CPI, was delayed to October 24 because of the ongoing US government shutdown. Market participants are expecting both indicators to accelerate at 3.1% on a year-on-year basis in September.

While inflation continuing an upward trend could provide the Fed reason to pause with its easing cycle to contain inflation pressure, weakness in the labor market urges the Fed to continue adjusting policy rates downward to loosen economic conditions.

Still weak labor market

Non-farm payrolls (NFPs) and the Job Openings and Labor Turnover Survey (JOLTS) report are good indicators of the health of the labor market in the US. However, the release of these data points is delayed until the US government resumes operations. Given this, market players settled with current data that is available to assess the state of the labor market in the US.

The Institute of Supply Management (ISM) employment indices for both the manufacturing and the services sectors indicate contraction, signaling continued weakness in the labor market.
In addition, we still expect NFPs to remain low in September given signals of weak demand amid economic uncertainties in the US.

Jobs concerns trump inflation

Despite inflation remaining elevated, speculations of a weak labor market along with economic uncertainties due to the ongoing US government shutdown, build the case for more policy rate cuts for the Fed.

Metrobank forecasts that the Fed will deliver a 25-bp rate cut in the next FOMC meeting, one of the two more rate cuts expected for the remainder of the year. This, together with expectation of another 25-bp cut in December by the Bangko Sentral ng Pilipinas (BSP), will widen the interest rate differential between the two central banks, providing some support to the peso.

(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses)

MARIAN MONETTE FLORENDO is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She holds an undergraduate degree in Mathematics from Ateneo de Naga and a master degree in Economics from UP Diliman. She loves traveling and watching mystery movies in her spare time.