Policy Rate Update: US Fed’s cautious step towards neutral

The US Federal Reserve (the Fed) reduced the Federal Funds Target Rate (FFR) by 25 basis points (bps) to 3.75%-4.00% during the Federal Open Market Committee (FOMC) meeting from October 28-29 in a divided vote.

Key points

• The FOMC reduced the key policy rate to stimulate demand and support the labor market. However, as inflation risks persist, US Fed Chair Jerome Powell said there is “no risk-free path” as prioritizing one mandate over the other could heighten risks on the other.
• Powell acknowledged that the ongoing US government shutdown will weigh on economic activity, though its impact is expected to reverse once resolved.
• Powell said another cut in the December FOMC meeting is “not a foregone conclusion”, citing strongly differing views within the committee.

What now?

•  Metrobank maintains its forecast for the Fed Funds Rate (FFR) and continues to expect another 25-bp rate cut in December followed by a cumulative 100 bps worth of cuts next year. These will bring the target FFR to 3.50%-3.75% by year-end and 2.50%-2.75% by end-2026.
• Although a now wider interest rate differential (IRD) between the Fed and the BSP could support the peso, a now relatively stronger dollar on Powell’s less dovish tone, along with current weak investor sentiment in the Philippines due to ongoing government issues, will cap the expected seasonal peso appreciation in the last two months of the year. Metrobank revises its USD/PHP exchange rate forecasts to 57.9 by year-end, 56.9 by end-2026, and 56.7 by end-2027.

(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.)

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