Fed Policy Rate Preview: Fed seen scaling back on rate cuts

In the US, the current inflation and labor market backdrop could point to the Federal Reserve (Fed) dialing back on the pace of policy rate cuts for now.

Metrobank Research forecasts two more 25-basis-points reductions in the remaining Federal Open Market Committee (FOMC) meetings this year, bringing interest rates to 4.5% by end-2024.

Price index target



US headline Personal Consumption Expenditures (PCE) price index has trended toward the 2% target since March, easing to an annual 2.2% in August from 2.6% in September.

It has also slowed down on a month-on-month basis by 0.1% from 0.2% in the preceding month. While the easing is broad, durable goods posted a notable 0.2% decline year-on-year, consistent with a downtrend since May of last year. This is expected to continue its downward trend with consensus estimate at 2.1% year-on-year and 0.2% month-on-month in September.

Core PCE, which takes out volatile energy and food costs, and Fed’s preferred inflation gauge settled at an annualized 2.7% in August, slightly higher than July’s 2.6%.

However, on a month-on-month basis, core PCE decelerated by 0.1% in August from 0.2% in July. The consensus estimate for the upcoming September PCE print remains at 2.6% year-on-year and 0.3% month-on-month, providing a case that while inflation is keeping its head down, it remains above the target.

PCE data are scheduled for release October 31, US time.

Labor numbers

September’s nonfarm payrolls (NFP) data surprising on the upside calmed bets of another 50-bps cut at the November FOMC meeting. Markets are currently pricing smaller reductions.

The recent NFP data showed signs of a solid labor market – the September print showing an increase of 240,000 month-on-month on the back of jobs in education, health services, and leisure and hospitality. Yet the uptrend may not be sustained, with the market expecting NFP to increase by a lower 110,000 in October from a month earlier after six weeks of labor strikes.

New filings for unemployment benefits, meanwhile, spiked by 260,000 individuals in the first week of October. Initial jobless claims are also expected to increase by 232,000 this week, higher than the 227,000 in the week of October 19.

The US unemployment rate in October may remain steady at 4.1%, supported by temporary jobs from election campaigns and emergency response against hurricanes.

October data on unemployment rate and NFP are scheduled for release on November 1.

Upcoming inflation and labor data are expected to weigh in on the Fed’s decision at the next FOMC meeting.

MARIAN MONETTE FLORENDO is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She provides macroeconomic analysis and forecasts for the bank. Her academic background is in Mathematics and Economics. She loves solving puzzles and watching mystery movies.

YOSHITAKA HIRAKAWA is a Financial Markets Sector Management Trainee at Metrobank. He holds a Bachelor’s in Management Engineering from Ateneo de Manila University. With a background in data-driven decision making and quantitative methods, he aims to provide meaningful insights. Hungry for adventure, he seeks new sights, sounds and experiences from cliff jumping and trying new cuisines.