Supply chain disruptions from ongoing US-Iran tensions have placed the US Federal Reserve in a tight situation: growth headwinds and growing pessimism call for further rate cuts, and yet stubborn inflation pressures constrain the scope for easing.
We expect the Fed to balance risks on its dual mandate of maximum employment and price stability. And that is by keeping rates steady for longer to control price pressures from oil prices, which may have peaked in the past month.
The projected Fed action would keep the federal funds rate (FFR) steady at 3.50%-3.75% at the upcoming Federal Open Market Committee (FOMC) meeting from April 28-29.
US inflation jumped sharply in March, with the headline Consumer Price Index (CPI) accelerating by 0.9% month-on-month, its fastest acceleration since June 2022. This surge was largely driven by higher energy prices which contributed 0.7 percentage points to overall inflation.
By contrast, core CPI, which excludes volatile food and energy, rose moderately by 0.2%, suggesting that underlying inflation pressures outside volatile commodities are easing and potentially reflecting softer domestic demand.
Meanwhile, the Fed’s preferred inflation gauges, Personal Consumption Expenditures (PCE) and core PCE, were already showing signs of acceleration prior to the latest escalation in US‑Iran tensions.
February data showed both measures rising 0.4% month‑on‑month, signaling lingering inflation pressures. With global oil prices under renewed pressure, March PCE readings are likely to see further upside from energy costs.
Looking ahead, elevated energy prices are still expected to continue feeding into headline inflation even with an ongoing ceasefire between US and Iran. Sustained inflationary pressure would reduce the Fed’s ability to ease rates and push back the timing of potential rate cuts.
Since May last year, US nonfarm payrolls (NFPs) have exhibited a recurring gain‑and‑loss pattern. The reported monthly job creation is frequently followed by a month of outright job losses, either in the initial release or through downward revisions.
This alternating cycle has resulted in limited net employment gains, underscoring the fragility of the labor market recovery.
March payrolls posted a headline gain of 178,000 jobs, but this followed a downward‑revised loss of 133,000 jobs in the prior month. This translates to a mere 45,000 job gains over a two‑month period.
While the US labor market has remained broadly in recovery mode, it lacked sustained momentum, as recurring headwinds like the historic 43-day government shutdown last year and renewed geopolitical tensions this year continue to disrupt sustained hiring momentum.
While elevated inflation pressures may push back the timing, persistent labor market weakness reinforces the case for the Fed to eventually resume its easing cycle.
Elevated energy prices continue to place upward pressure on inflation, while a persistently weak labor market complicates the policy outlook, leaving Fed officials in a tight position. Our latest dove-hawk meter shows a growing number of policymakers shifting toward a neutral stance, as ongoing geopolitical tensions cloud the outlook for inflation, employment, and overall economic activity. We expect the Fed to keep rates steady.
Following the recent policy rate hike by the Bangko Sentral ng Pilipinas (BSP) and the expected policy action of the US Fed next week, we expect the interest rate differential (IRD) to be maintained at 75 basis points.
We also expect the dollar-peso exchange rate to trade sideways but remain volatile to shifts in sentiment amid ongoing geopolitical risks.
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.
