Fed Preview: Starting the year with a break 

It may be time to take a breather.

Financial-market players pulled back expectations for a rate cut at next week’s US Federal Open Market Committee (FOMC) meeting, and instead priced a higher chance for a March reduction. Metrobank aligns with this view.

Deeper than the headline

Inflation in the US eased over the past year, providing the Federal Reserve (Fed) enough room to ease aggressively toward the end of 2024. However, recent guidance from the last rate-setting meeting highlights that risks to the inflation outlook are on the rise, especially with newly inaugurated US President Donald Trump’s proposed tariffs and tax cuts.

• Headline consumer price index (CPI) picked up in December, with energy prices accounting for more than 40% of the inflation for the month. Global oil prices largely stoked energy prices.
• Core CPI – which excludes volatile food and energy – signals easing, suggesting inflation’s trajectory toward the 2.0% Fed target remains intact.
• US PCE, the Fed’s preferred inflation measure, barely moved in November from the preceding month, providing a better picture of inflation’s trajectory to the target.

Although risks remain, officials such as Fed Chicago President Austan Goolsbee and New York Fed President John Williams expressed confidence with inflation moving sustainably toward the target. This could provide the Fed space to reduce policy rates, perhaps later this year.

Solid labor market

The latest US nonfarm payrolls (NFP) data, among others, have shown great improvements in the past few months. With the Fed turning cautious due to upside risks to inflation, this may be reason enough for a pause at the January FOMC meeting.

• December NFPs increased by 256,000 month-on-month, largely due to a substantial increase in payrolls across the Trade, Transportation, and Utilities industries. This may be related to the transport industry, whose workers’ strikes were resolved back in November.
• High frequency data such as initial jobless claims rose to 217,000 in the second week of January, a slight increase from the previous week’s 203,000.

The latest labor market report showed that unemployment has remained steady at 4.1%, topping off what appears to be a solid US labor market.

Easy as one-two-three

Robust economic growth, a resilient labor market, and slightly elevated inflation are three reasons enough to suggest that the Fed will pause at its first meeting for the year.  Still, indications that core PCE is inching closer to the Fed’s long-run target keep the door open for a resumption of the rate-cut cycle later in the year.

With this, Metrobank Research forecasts that the Fed will maintain the Federal Funds Rate at 4.25%-4.50% in the next meeting on January 28-29, US time.

(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. Her academic background is in Mathematics and Economics. She loves solving puzzles and watching mystery movies.

YOSHITAKA HIRAKAWA is a Research Officer of the Research and Market Strategy Department, Institutional Investors Coverage Division, Financial Markets Sector, at Metrobank. He holds a Bachelor’s in Management Engineering from Ateneo de Manila University. With a background in data-driven decision making and quantitative methods, he aims to provide meaningful insights. Hungry for adventure, he constantly seeks new sights, sounds and experiences, from cliff jumping to trying new cuisines.