Fed Preview: The rate-cut waiting game

As the US-Iran tensions disrupt global oil supply chain, the US Federal Reserve (Fed) will likely keep policy rates steady for longer to contain inflation.

Metrobank expects the Fed to prioritize its price stability mandate and wait before proceeding with its easing cycle, keeping the federal funds rate (FFR) steady at 3.50%-3.75% at the upcoming Federal Open Market Committee (FOMC) meeting on March 17-18, EST.

Labor-market slump

The latest data show that non-farm payrolls (NFPs) fell by 92,000 in February. In addition, December’s final revision shows a 17,000-job loss, reversing the earlier estimate of a 48,000-job gain. On top of this, the US unemployment rate has also risen in recent months and remained above the 4% level.

Labor-market data in the past months, following the resumption of the US government from the shutdown, signal stalled recovery, strengthening the case for the Fed to continue its easing cycle.

Inflation pressure

Before the tensions in the Middle East escalated, US inflation was already a pressing concern for the Fed given higher tariffs. Latest data indicate that the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures (PCE), remains elevated. The latest figure in December showed an annual increase of 3.0%, a percentage point higher than the Fed’s target.

Consumer price index (CPI), on the other hand, shows signs of easing in the first two months of this year, signaling some downward pressure on inflation.

While lower tariff after the Supreme Court overturned US President Donald Trump’s duties could provide downside price pressure, the conflict in the Middle East is seen keeping global oil price elevated. This will lead to faster inflation, limiting the pace of the Fed’s rate cuts.

Taking a pause

With inflation likely to stay above target for longer, central bank watchers push back expectations for a Fed rate cut. For now, labor market weakness takes a back seat to inflation concerns.

Metrobank continues to forecast a 25-basis-point rate cut later this year but expects the Fed to wait to see a clearer downward path for inflation before resuming lowering rates.

The Fed’s anticipated stance will maintain the current 50-bp interest rate differential (IRD) with the Bangko Sentral ng Pilipinas. Beyond the IRD, movements in the USD/PHP exchange rate will depend more heavily on global oil-price trends and investor sentiment amid ongoing geopolitical risks.

(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 losse)

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