Fed Preview: Steady for now

We believe that the US Federal Reserve (Fed) will keep the Federal Funds Rate (FFR) unchanged at 3.50%-3.75% during the upcoming Federal Open Market Committee (FOMC) meeting on June 16-17 (Eastern Standard Time), to balance risks to its dual mandate of price stability and maximum employment.

Inflation risks seem to outweigh risks in the labor market as it turned surprisingly resilient amid economic risks. Still, the US Federal Reserve (Fed) is expected to continuously assess the impact of the Middle East tensions on the US economy.

US inflation continued its upward trend on a year-on-year (YoY) basis, with both headline Consumer Price Index (CPI) and Personal Consumption Expenditure (PCE) accelerating to 3.8% in April, as higher energy prices continue to drive the upward trajectory in headline figures.

Meanwhile, core PCE, which excludes volatile food and energy, while remaining above the Fed’s 2.0% full-year target at 3.3% YoY in April, showed a moderate increase of 0.2% month-on-month. This suggests that while the annual figure point to some acceleration, the monthly trend indicates that underlying inflation pressures have been relatively insulated from recent price swings and may even be easing. Overall, this points to a softening in both supply- and demand-side price pressures.

While elevated energy prices are expected to continue affecting other commodities in the US, recent developments indicate that diplomatic progress, albeit slow, may help calm markets. This implies that the worst could be over for global oil prices, with any further large spikes highly unlikely in the near term.  

Sustained inflationary pressure could push back any further rate cuts from the Fed in the near term.  

The recent jobs reports show that the US labor market has been surprisingly resilient.

May non-farm payrolls posted a 172,000-gain relative to the previous month. Data for the two previous months also showed upward revisions, with the 3-month moving average (3MMA) now at 188,000, an uptick from the preceding month’s 79,000 3MMA.  

Resilient labor market reduces the urgency from the Fed to reduce policy rates in the near-term. 

Fed officials are likely to remain on a wait-and-see mode and keep rates unchanged during the next Fed meeting scheduled this month to continue assessing risks, especially with new Fed chair Kevin Warsh setting the tone for his chairmanship.  

Our latest dove-hawk meter shows a neutral bias, as ongoing geopolitical tensions cloud the outlook for inflation, employment, and overall economic activity.

Although the labor market shows early signs of recovery, sustained momentum has yet to be seen. With this, the Fed is likely to avoid premature policy rate hikes to prevent undermining labor market recovery. Metrobank continues to expect that the Fed will eventually resume its easing cycle next year once inflation moves toward the Fed’s target.

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 on June 18, Philippine time, to address inflationary pressures that have intensified over the past three months.

While the anticipated divergence in policy actions between the Fed and the BSP will widen the interest rate differential (IRD) to around 100 bps, the peso is likely to remain under pressure amid both external and domestic headwinds, supporting an upward bias in USD/PHP.

Although the exchange rate is expected to trade sideways following the central bank meetings, volatility is likely to persist amid shifting market sentiment and ongoing geopolitical risks.

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.