U.S. Fed held rates steady at 5.00-5.25%<\/strong><\/p>\n\n\n\n As expected, the Federal Open Market Committee (FOMC) decided against another rate hike last week. The Fed\u2019s policymakers said in a statement that \u201cholding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy,\u201d indicating that the Fed will be closely monitoring data points in the next six weeks to see if their efforts to stave off inflation is bearing fruit.<\/p>\n\n\n\n So far, the results have been encouraging, albeit uneven. The latest report showed that headline inflation cooled to 4.0% year-on-year (YoY), but core inflation remained sticky at 5.3%YoY. Fed policymakers prefer to use core PCE (personal consumption expenditures), which considers expenditures made by urban and rural consumers as well as expenditures made on their behalf by third parties, as guidance in setting rates. The next core PCE data is scheduled for release at the end of the month, and the latest report showed a 0.4% month-on-month (MoM) increase. In comments after the Fed meeting, Fed Chair Jerome Powell said that they are not seeing a lot of progress on core PCE and they want to see it moving down \u201cdecisively\u201d.<\/p>\n\n\n\n Another key data point would be labor statistics, which is released on the first Friday of every month. So far, jobs growth has been persistently strong and beaten consensus estimates every month since May 2022. The latest data showed that the U.S. economy created 339,000 new jobs in May, higher than the previous month\u2019s 294,000 and consensus estimates of 193,000. Wage growth, a key driver of consumption and inflation, increased by 0.3% MoM. This has slowed significantly from the previous month\u2019s 0.5% but Powell has also said that wage growth needs to slow further.<\/p>\n\n\n\n The dreaded dot plot has moved higher<\/strong><\/p>\n\n\n\n The Summary of Economic Projections, colloquially known as the dot plot, indicated that half of the committee members expect two more 25-bps rate hikes this year. That would bring the Fed benchmark up to 5.50-5.75%. Four members see one 25-bps rate hike to 5.25-5.50%, while only two members said that they expect rates to hold steady for the rest of the year. This is an increase from the last dot plot in March which showed that most committee members see only one rate hike on the horizon. <\/p>\n\n\n\n On a longer timeframe, members are also forecasting higher rates than they did in March. Most members now see an average Fed Funds rate of 4.6% in 2024 (from 4.3% in March) and 3.4% in 2025 (from 3.1%). This implies cuts of 1.00% every year for the next two years until the rate reaches its eventual long-term target of 2.50%.<\/p>\n\n\n\n Forcing the BSP\u2019s hand<\/strong><\/p>\n\n\n\n While the Bangko Sentral ng Pilipinas has indicated that they would prefer to hold rates steady until the end of the year, two 25 bps hikes from the Fed may force the BSP to raise rates to maintain a rate differential of 1.00% to defend the local currency. <\/p>\n\n\n\n The BSP already skipped the last meeting when the Fed raised by 25 bps, and skipping the next two hikes would take the rate differential down to 0.50%. We will have to see if the BSP would be willing to risk stifling growth just to defend the peso.<\/p>\n\n\n\n