Peso slumps anew on Fed’s hawkish tilt

THE PESO weakened anew against the dollar on Thursday after the US Federal Reserve chief said their latest rate cut could be the last for the year amid a mixed economic picture.

The local unit closed at P58.85 versus the greenback, dropping by 16 centavos from its P58.69 finish on Wednesday, Bankers Association of the Philippines data showed.

The peso opened Thursday’s session slightly weaker at P58.73 versus the dollar. It logged an intraday high of P58.58, while its weakest showing was at P58.98 against the greenback.

Dollars traded rose to $2.23 billion from $2.01 billion on Wednesday.

“The dollar was generally stronger on Thursday after Fed Chair Jerome H. Powell said a December rate cut was not certain,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

“The dollar-peso closed higher, tracking other currencies after the Fed cut rates but gave a hawkish tone. Fed Chair Powell questioned whether a December rate cut was needed,” a trader said in a phone interview.

A policy divide within the US central bank and a lack of federal government data may put another interest rate cut out of reach this year, Mr. Powell said on Wednesday, as he acknowledged the threats that officials see to the job market but also the risky nature of making further rate moves without a fuller picture of the economy, Reuters reported.

The Fed on Wednesday cut interest rates by a quarter of a percentage point, as expected, as a way to temper any further weakening of the job market. But the central bank’s new policy statement included several references to the lack of official data during a federal government shutdown, and Mr. Powell told reporters later that policymakers are likely to become more cautious if it deprives them of further job and inflation reports.

“We’re going to collect every scrap of data we can find, evaluate it and think carefully about it. And that’s our job,” Mr. Powell said in a press conference after a two-day policy meeting, as he ticked off private data the Fed can use, along with its own in-house surveys of business executives and less formal interviews with a range of contacts around the country.

“If you asked me could it affect… the December meeting, I’m not saying it’s going to, but yeah, you could imagine that. You know, what do you do if you’re driving in the fog? You slow down.”

His comments show the developing dilemma for the Fed as a budget dispute between the Trump administration and Democrats in Congress extends into a second month, with the government unable to carry out surveys and produce reports that are key to central bankers’ policy decisions — in this case possibly delaying rate cuts that President Donald J. Trump himself wants.

Beyond the data issues, Mr. Powell said there were “strongly differing views” among his Fed colleagues about the appropriate path for monetary policy moving forward, with “a growing chorus now… feeling like maybe this is where we should at least wait a cycle” before cutting rates again.

Financial markets responded to Mr. Powell’s remarks by reducing bets on another rate cut at the Fed’s Dec. 9-10 meeting, a prospect now given roughly two-to-one odds.

Mr. Powell still called the Fed’s 10-2 vote in favor of lowering the benchmark interest rate to the 3.75%-4% range a “solid” endorsement of easing policy to help support a gradually cooling labor market.

But “there were strongly differing views about how to proceed in December,” Mr. Powell said, an unusually blunt comment about an upcoming meeting, something Fed chiefs usually shy away from.

“A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it, policy is not on a preset course,” he said.

PESO SUPPORT
Still, the Fed’s latest rate cut could help stabilize the peso against the dollar in the near term after the local unit hit a new record low of P59.13 on Tuesday, analysts said.

This is as the reduction effectively widened the differential between the US central bank and the Bangko Sentral ng Pilipinas’ (BSP) key rates to 75 basis points (bps). Earlier this month, the BSP likewise lowered benchmark interest rates by 25 bps for a fourth consecutive meeting to bring its policy rate to 4.75%.

The wider rate gap “points to additional support for the Philippine peso, all else constant,” Metropolitan Bank & Trust Co. Chief Economist Nicholas Antonio T. Mapa said in a Viber message.

“[With] seasonal inflows on the way, we could see the Philippine peso enjoy a modest appreciation before yearend.”

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., also said the bigger differential “should help stabilize the peso for now,” but noted that other factors like domestic corruption concerns have also contributed to the peso’s recent slide.

The Fed’s latest move and cautious policy outlook, as well as the weak peso, are unlikely to affect the BSP’s own easing path, the analysts said.

Unlike the Fed, BSP policymakers have said that another 25-bp cut is possible at the Monetary Board’s Dec. 11 meeting, with more reductions beyond that also on the table amid benign inflation and a softening growth outlook as they expect a widening graft scandal involving state flood control and infrastructure projects to affect both public and private investments.

“The BSP will take into account the full range of data on domestic inflation, financial conditions and growth outlook at its upcoming policy meeting,” Mr. Mapa said.

“The BSP-Fed policy rate differential is not a major concern, despite differing views on monetary policy. This is because the US is also facing its own issues such as Fed independence, tariff-induced inflation, and political issues that may impact confidence on the US dollar. Thus, we may see the BSP monetary policy easing path to remain intact despite the exchange rate reaching P59 this week,” Reinielle Matt M. Erece, an economist at Oikonomia Advisory and Research, Inc., said in a Viber message. — A.M.C. Sy and K.K. Chan with Reuters