Weighing the case for a long Fed pause

Markets are split on the US Federal Reserve’s (Fed) next move. While futures are pricing in a 25-basis-point rate hike before the year ends, a compelling case for an extended pause deserves close attention.

During the latest monetary policy meeting, the Fed kept its benchmark rate unchanged at 3.50-3.75% for the fifth consecutive time. However, three policymakers dissented in favor of a rate hike, the first time in a decade. With Fed Chair Kevin Warsh’s known aversion to forward guidance, markets are reading these dissents as a strong signal that the central bank is leaning hawkish. 

The last time three Fed officials dissented in favor of a hike was in September 2016. At the time, the internal pressure culminated in a rate increase by December 2016, which coincided with the next updated Summary of Economic Projections (SEP). Exactly a decade later, the same pattern is seen: three dissents in July 2026, with updated SEPs looming in September.

Furthermore, the current geopolitical backdrop, specifically the recent collapse of the US-Iran ceasefire, echoes the inflationary shocks of the 2022 Russia-Ukraine war, a period when the Fed hiked aggressively to combat surging prices. 

Despite the hawkish signals, the Fed’s dual mandate of maximum employment and stable prices provides a strong argument for holding rates steady.

Labor market: “Low-hiring, low-firing” stalemate

• In 2016, the labor market saw resilient, service-driven growth. In 2022, it was fueled by massive pent-up post-pandemic demand.
• However, today’s environment is entirely different, as businesses are trapped in a low-hire, low-fire cycle, reluctant to shed existing talent but equally wary of the high costs of recruitment.
• Raising rates in a labor market that is already losing momentum could weaken hiring and push up unemployment.

Inflation: High, but contained

• While inflation spiked to around 4% year-on-year in the early part of 2026 during the peak of the Middle East conflict, easing energy and gasoline prices are currently driving deceleration as the US and Iran initially reached a ceasefire agreement.
• The recent surge in energy costs due to a renewed US-Iran stalemate is being offset by cooling core inflation and high base effects. Since the 9% inflation peak seen in 2022 is a distant reality, the Fed has the leeway to wait and assess the data without being forced into an immediate rate hike. 

With the market pricing in nearly even odds of a December rate hike, the possibility of a rate pause leaves room for bond yields to ease, which could lift equities in the medium term.

However, as markets digest ongoing volatility in the Middle East, a defensive stance remains prudent: 

Global strategy: In fixed income, favor short- to medium-term bonds. In equities, maintain an overall defensive posture, but selectively add exposure to the technology sector as sentiment improves. Expect the US dollar to remain range-bound in the near term.

Local strategy: A potential Fed rate pause and further rate hikes by the Bangko Sentral ng Pilipinas (BSP) would widen the interest rate differential between the Fed and the BSP, providing underlying support for the peso. However, given the current weak domestic economic backdrop, local investors should mirror global strategy by sticking to short-term local bonds and favoring defensive equity sectors. 

SOPHIA THERESE “PIA” BONIFACIO is a Research Officer at Metrobank, covering local and offshore macroeconomic research. She obtained her Bachelor’s degree in Economics with a Specialization in Financial Economics, cum laude, from the Ateneo de Manila University and is a Certified UITF Sales Person (CUSP). Pia enjoys long road trips and loves a good cup of hojicha latte.