The US Federal Reserve (Fed) is likely to keep the Federal Funds Rate (FFR) unchanged at 3.50%-3.75% at the upcoming Federal Open Market Committee (FOMC) meeting on September 15-16, Eastern Time, to balance risks to its dual mandate.
Although inflation in the US remains elevated and upside risks persist, it has already eased from its projected peak this year. Moreover, the labor market has strengthened, but momentum in recovery remains fragile.
Nonetheless, the upcoming US Consumer Price Index (CPI) print scheduled for release today, September 11, Eastern Time, is expected to weigh heavily on the FOMC decision.
Easing inflation suggests that the impact of global oil price shocks stemming from ongoing geopolitical tensions may be short-lived. Escalating tensions in the Middle East have exerted further pressure on the global oil market, with Brent breaching the USD 100 per barrel level for the first time since July. However, the inflation impact of higher tariffs, which began early last year, may already be waning.
Moreover, core inflation, which excludes volatile food and energy items, has remained at 3% amid persistent supply-side risks. This suggests underlying inflation may have remained relatively insulated from oil price shocks.
While inflation expectations remain above the Fed’s target, the current moderation in price pressures suggests a continued, albeit gradual, downward trend. This reduces the urgency of immediate policy rate adjustments.
The latest non-farm payrolls data showed strong job gains in August, driven largely by a reversal of job losses in the Leisure & Hospitality and Government sectors recorded in the preceding month. Recent swings in the payrolls figure could have been influenced by seasonal factors. Thus, a normalization could be anticipated in the coming months.
Meanwhile, the unemployment rate edged lower to 4.1% in the past two months, with the marginal decrease attributed to an increase in the labor force and labor force participation.
Given ongoing economic uncertainty, sustaining momentum in the labor market recovery remains crucial.
Inflation has continued to ease from its May peak. Meanwhile, the labor market continues to recover gradually. As economic uncertainties remain, risks to the Fed’s dual mandate of price stability and maximum employment persist.
Metrobank maintains its outlook that the Fed’s current policy stance remains appropriate to balance risks to its dual mandate. Nonetheless, with differing views among Fed officials, the FOMC is likely to remain divided, with some officials favoring a rate hike over keeping rates unchanged.
On the domestic front, the Bangko Sentral ng Pilipinas (BSP) is expected to continue tightening monetary conditions and deliver another 25-basis-point (bp) policy rate hike at the next Monetary Board meeting in October, ending the current hiking cycle at 5.25%.
If the Fed keeps rates unchanged this month, the interest rate differential between the Fed and the BSP will remain at 125 bps. Following the Fed’s decision, the peso is likely to trade sideways at the 62-level as weak sentiment and seasonal inflows are likely to drive weak peso performance in the near term.
