Early US Fed rate cuts unlikely — financial council
THE US Federal Reserve is unlikely to cut key rates soon, the Financial Stability Coordination Council (FSCC) said on Tuesday, easing pressure on the Philippine central bank to follow suit.
The Fed could even deliver another rate increase, the council said in its 2023 financial stability report.
“Any expectation of an early rate cut is optimistic,” the FSCC said. “It is more likely that the Fed will keep its policy rates elevated over a longer period than expected by the market.”
Last week, the US Federal Open Market Committee kept interest rates steady for the fourth straight meeting. The target Fed fund rate is at 5.25-5.5% after the US central bank increased it by 525 basis points (bps) from March 2022 to July 2023.
Despite aggressive rate increases, market players have yet to see a global recession led by the US, leading investors to put more money in riskier investments and adopt a “risk-on” stance, the FSCC said.
“Markets though are fickle and arguably, with a heightened state of interconnectedness, increasingly fickle,” the council said. “Things can change in timing and magnitude with fresh economic data or if stakeholders misread the pronouncements of authorities.”
The council noted that even though the Fed acknowledged in December that the rate hike cycle is near its peak, the US central bank is also looking for further assurance that inflation is firmly heading toward its 2% target.
“We believe that the assurance being sought by the Fed requires that declining inflation be accompanied by a softening labor market,” the council said. “This is not yet the case, with employers adding a stronger-than-expected 216,000 in nonfarm payroll for the month of December.”
The interagency body also noted that while US inflation has eased and the impact of the Fed’s rate increases has not been as distinct, “the task of calibrating the economy with the policy rate is not yet complete.”
“This is why most central banks do not take off the table the possibility of yet another rate hike,” it added.
The FSCC is an interagency council composed of the Bangko Sentral ng Pilipinas (BSP), Department of Finance, Insurance Commission, Philippine Deposit Insurance Corp. and Securities and Exchange Commission.
The body regularly meets to evaluate potential systemic risks in the financial system and come up with macroprudential policy interventions to mitigate the risks.
BSP tightened borrowing costs by 450 bps from May 2022 to October 2023, bringing the key rate to 6.5%, the highest in 16 years.
Fifteen of 17 analysts in a BusinessWorld poll last week expected the Monetary Board to keep policy rates steady.