Fed Preview: The inflation breather

At the height of the administration of US President Donald Trump’s political pressure for the Federal Reserve (Fed) to deliver aggressive rate cuts, monetary authorities have reassured market players that the institution remains independent, and data driven.

Metrobank projects that the Fed will continue to balance risks on its dual mandate — maximum employment and stable prices — blunting political pressure from the Trump administration. Metrobank expects that the Fed will keep the federal funds rate (FFR) steady at 3.50%-3.75% at the first Federal Open Market Committee (FOMC) meeting this year on January 27-28.

Labor market pains

The US added 50,000 non-farm payroll jobs (NFPs) in December, according to preliminary data. Together with November’s downwardly revised additional 56,000 NFPs, these signal potential labor-market recovery after a sharp 173,000 decline in October due to the US government shutdown.

Despite the recent gains, data shows that only 584,000 non-farm jobs were added last year, a steep decline from the over 2 million added in 2024. This persistent softness in the labor market strengthens the case for a more accommodative policy stance.

Inflation concerns

The current labor market calls for policy rate cuts. However, the current inflation situation in the US forces the Fed to hit the pause button, for now.

The Fed’s preferred inflation gauge — the Core Personal Consumption Expenditures (PCE) — remains elevated, with the latest figure in September showing an annual increase of 2.8%. In the first 9 months of 2025, Core PCE increased by 2.8%, only slightly lower than the 2.9% full-year average in 2024, showing stickiness in inflation, and providing the Fed reason to pace rate cuts.

Scaled tipped on the labor market

While weakness in the labor market strengthens the case for the Fed to continue its easing cycle, stubborn inflation argues for keeping a relatively restrictive policy rate setting. With the Fed managing risks on both sides of its dual mandate, we believe that most of the Fed officials will likely prioritize labor market stability to support lower-income household growth.

Market players’ sentiment remains volatile amid the Trump administration’s pressure on the Fed, including US prosecutors opening of a criminal investigation on Fed Chair Jerome Powell over his testimony about renovations to Fed buildings.

Moreover, market players now await who Trump will appoint as Fed Chair to replace Powell, who is set to end leadership at the central bank in May. Although the new Fed chair will likely have a similar dovish leaning with Trump-appointee Governor Stephen Miran, we believe that the Fed’s overall policy direction will remain data-driven and independent.

While Metrobank forecasts a cumulative 100 basis points worth of policy rate cuts this year, we are forecasting a pause in the easing cycle in the first Fed meeting this year. This will preserve the current interest rate differential (IRD) with the Bangko Sentral ng Pilipinas (BSP), and may help prevent any further sharp depreciation on the peso, which is currently trading above the PHP 59-level per dollar.

(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses)

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.