The US Federal Reserve (Fed) is likely to keep the Federal Funds Rate (FFR) unchanged at 3.50%-3.75% at the upcoming Federal Open Market Committee (FOMC) meeting on July 28-29 (Eastern Standard Time) to balance risks to its dual mandate.
The combination of insulated core inflation and a still-fragile labor market recovery suggests that the current US monetary policy stance remains well-positioned to address risks amid a volatile geopolitical environment. The US Federal Reserve (Fed) is likely to continue assessing the impact of the Middle East tensions on the US economy before committing to a particular policy rate path, particularly as renewed hostilities heighten the need for diplomacy between the US and Iran.
Although headline inflation figures continue to reflect high global oil prices, underlying inflation measured by core consumer price index (CPI) and core Personal Consumption Expenditure (PCE) continues to show that it may remain relatively insulated from recent oil price shocks.
The signing of the memorandum of understanding (MoU) between the US and Iran in June, and the subsequent talks through mediators, supported easing in headline inflation in May and June. However, recent renewed hostilities, with diplomacy taking a step back, have caused global oil prices to surge. This is expected to be reflected in higher US oil prices and, subsequently, higher headline inflation readings. Nonetheless, underlying inflation could remain insulated unless high global oil price increases persist.
Above-target inflation expectations support the case for maintaining the current monetary policy stance, pushing back expectations for near-term rate cuts.
US labor market conditions continue to show early signs of improvement, with nonfarm payrolls (NFP) posting monthly gains for four consecutive months, following a period of mixed monthly job gains and losses since May 2025.
However, June payrolls growth fell below 100,000 for the first time in four months. Combined with downward revisions to payroll figures over the preceding two months, this suggests that while recent job creation points to a recovering labor market, the pace of recovery remains fragile.
Meanwhile, the unemployment rate edged down to 4.2% in June from 4.3%, where it had remained for the previous three months.
Given ongoing economic uncertainties, sustaining momentum in labor market recovery will be crucial. As such, labor market conditions continue to support the case for the Fed to eventually move toward a relatively accommodative policy stance.
Inflation outlook remains above the Fed’s target this year, although underlying inflation appears insulated from recent oil price shocks. On the other hand, labor market conditions show signs of recovery, albeit still fragile.
Although our latest dove-hawk meter shows a neutral to hawkish bias, we maintain our outlook that the Fed’s current policy rate stance is at an appropriate level to address risks to both sides of the Fed’s dual mandate of price stability and maximum employment. Metrobank continues to project that the Fed will keep rates unchanged through the remainder of the year and in 2027.
On the domestic front, the Bangko Sentral ng Pilipinas (BSP) is expected to deliver a 25-basis-point policy rate hike at the upcoming Monetary Board meeting in August to address inflationary pressures that have begun to spread to other commodities through second-round effects.
The anticipated divergence in policy actions between the Fed and the BSP will further widen the interest rate differential (IRD) to around 125 bps in August. The peso is likely to trade sideways, as persistent risk-off sentiment and a wider trade deficit are expected to offset any potential gains from a wider IRD. As a result, USD/PHP is likely to trade above the 61 level in the near term.
MARIAN MONETTE FLORENDO-OBIAS is a Research Officer of the Macro Research Department, Markets Advisory 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.
