UBS On-Air: Paul Donovan Daily Audio 'Nervousness about policy'
At a Glance
The January FOMC minutes reveal a Fed wary of Trump's policy impact, particularly the risk of a new inflation wave via tariffs and immigration restrictions. Companies may pass on higher costs more readily than during Trump's first term, given consumers' heightened inflation sensitivity post-pandemic. Markets discount Trump's offhand remarks on a China trade deal, focusing instead on the Fed's cautious stance. This keeps the dollar bid but leaves USD longs vulnerable to any softening in tariff rhetoric or growth data.
Key Takeaways
- 01Fed minutes show nervousness over Trump's policies reigniting inflation via tariffs and immigration restrictions.
- 02Companies likely to pass through tariff costs more readily than in 2018-19 due to heightened consumer price sensitivity.
- 03Markets heavily discount Trump's offhand China trade deal remark; focus remains on policy risk.
- 04UBS sees profit-led inflation as a real risk, with retailers using tariffs to expand margins.
Full Analysis
What the desk is arguing
UBS Chief Economist Paul Donovan argues the Fed's January minutes signal heightened caution on rate policy due to nervousness over Trump's economic agenda, specifically the risk that tariffs and immigration restrictions reignite inflation. The key novelty versus Trump's first term, per the full note [UBS On-Air], is that companies now feel emboldened to pass through trade taxes to consumers because post-pandemic inflation has conditioned them to accept price increases.
Donovan warns of "profit-led inflation" where retailers use tariffs as a cover to expand margins, reprising the third wave of COVID-era inflation. He dismisses Trump's offhand comment about a possible China trade deal as low-probability, given the President's pattern of eccentric public statements. Markets are applying a large discount to such announcements.
How other firms see it
Aligned firms include JPMorgan and Goldman Sachs, which both highlight tariff-driven upside inflation risks and a slower Fed easing cycle. Morgan Stanley is more cautious on USD upside, flagging that growth concerns could eventually cap rate expectations. Citigroup and Deutsche Bank are contrarian, arguing that Trump's bark may be worse than his bite and that the Fed's caution is already priced.
Related pairs to watch: USD/CNH for trade deal headlines, EUR/USD for rate differential shifts as the ECB stays more dovish than the Fed. The DXY index will reflect the Fed's caution versus other central banks.
Market Implications
Watch for further USD strength if tariff announcements escalate, especially against EM and Asian currencies. A break below 1.0750 in EUR/USD would confirm dollar momentum, while a dovish Fed surprise would reverse the trend. Monitor US CPI releases for signs of pass-through inflation.
From the original
The minutes of the January Federal Reserve meeting gave a cautious policy outlook. Nervousness about the economic consequences of US President Trump’s policies was clear. In particular, the potential for Trump to ignite a further wave of inflation was cited. Companies seem more w
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4 itemsUBS On-Air: Paul Donovan Daily Audio 'Policy and policy uncertainty'
The market is at a crossroads as it weighs the Federal Reserve's recent decision to keep interest rates unchanged against ongoing policy uncertainty stemming from the Trump administration. Per the full note from UBS, a March rate cut appeared uncertain due to concerns over the potential inflationary impact of the administration's policies, yet the Fed's characterization of policy as restrictive hints that rate cuts remain feasible in the future. With this backdrop, traders should remain alert to the Fed's signaling, especially amid a backdrop of income security for consumers, which has bolstered spending across developed economies. It is crucial to consider how external pressures, such as criticisms from President Trump, could shape the Fed's decisions going forward.