Fed Preview: Diverging views on rate action

Financial markets are pricing in a sustained interest-rate pause by the US Federal Reserve. But data suggests the need for a cut.

What will Fed Chairman Jerome Powell’s next step be?

Markets turn hawkish

Powell has recently been saying that the US economy “continues to be in a good place,” suggesting a now less dovish stance compared to when the Fed began its monetary easing cycle in September last year.

With the Fed Chair’s recent language, financial-market players are now pricing unchanged policy rates at the Fed’s meeting on March 18-19, US time. This, as tariff policies by US President Donald Trump remain unclear.

Bloomberg data shows that market analysts now project a cumulative 50-75 bps for the year, compared to the 100-125 bps projected as of September 2024.

Data point to a cut sooner

The latest consumer price index (CPI) data suggests there is room to cut rates in the near term.

US headline CPI came in at 2.8% year-on-year in February, a slowdown from the preceding month’s 3.0%. The month-on-month increase also suggests slowing inflation at only 0.2% in February, compared to the 0.5% in January.

Consumer outlook may need boost

After heavy lifting in the fourth quarter of 2024, consumption growth may slow this year in the US, as uncertainty from Trump’s tariff policy weighs on consumer sentiment.

The University of Michigan’s consumer sentiment index dropped for the second consecutive month in February, while the Conference Board’s consumer index fell by its largest monthly drop since August 2021. The less upbeat consumer outlook reflects uncertainties from Trump’s policies that have yet to be fully detailed.

Meanwhile, although jobs numbers appear solid for now, market participants remain wary of the impact of the Department of Government Efficiency’s mass layoffs may have on the jobs numbers and the overall economy.

A rate cut could help counter this outlook and boost consumer spending.

Metrobank’s take

We expect a 25-basis point cut from the Federal Reserve on March 18-19. This will bring the Federal Funds rate (FFR) down to 4.25% from the current 4.50%.

MARIA KAILA BALITE is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. She holds a Master’s degree in Applied Economics and also majored in Financial Economics for her Bachelor’s degree, both from De La Salle University Manila. Outside of work, her interests include thriller movies, K-dramas, and dogs.