Policy Rate Views: US Fed weighs key factors for potential monetary easing

The US Federal Reserve is considering a potential rate cut as early as September 2024, driven by several key factors. Foremost among these is the moderation of inflation, with the Core Personal Consumption Expenditure (PCE) Price Index holding steady at 2.6% in June, down from higher levels earlier in the year.

This trend is complemented by a gradual decline in the Consumer Price Index (CPI), which decelerated to 3.0% in June. US Fed Chair Jerome Powell has acknowledged “modest” progress toward the 2% inflation target, signaling a more dovish stance on monetary policy.

Additionally, the labor market shows signs of achieving a better balance. While remaining strong with June nonfarm payrolls increasing by 206,000, a slight rise in unemployment to 4.1% suggests a gradual cooling.

Market expectations are also playing a role, with financial markets fully pricing in a 25-basis-point cut in September. The Fed’s recognition of further progress towards its dual mandate of price stability and maximum employment further supports the case for a potential rate cut.

These factors collectively contribute to Metrobank Research’s forecast of a possible 75 basis points reduction by the US Fed in the federal funds rate by year-end, potentially beginning with the September 18 Federal Open Market Committee (FOMC) meeting.

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