UBS On-Air: Paul Donovan Daily Audio 'Ninety one days'
At a Glance
The desk believes the Federal Reserve's recent signaling reflects a marked shift towards a more cautious approach to rate cuts, as noted in the latest minutes. While a rate cut was considered appropriate back in December, the Fed under Chair Powell is likely to pursue a slower pace for future reductions, with inflation trends dictating the pace into 2025. Per the full note from UBS, the prospect of inflation risks tied to proposed trade policies under the new administration furthers the complexity of the Fed's outlook.
Key Takeaways
- 01The Fed is likely to slow the pace of rate cuts while focusing on inflation trends.
- 02Future inflation risks from proposed policies under the new administration add complexity to the Fed's decisions.
- 03Key targets from other firms indicate a spectrum of confidence regarding the Fed's approach to rate adjustments.
- 04The interplay between U.S. monetary policy and global economic factors remains critical for markets.
Full Analysis
What the desk is arguing
The desk posits that the Federal Reserve is transitioning to a more tempered strategy regarding interest rate adjustments. This following the release of the December meeting minutes highlights the ongoing indecision and evolving perspective under Chair Powell. According to UBS economist Paul Donovan, the current trajectory implies more modest, measured cuts focused on tracking inflation trends over the coming years.
Supporting this view, the Fed has indicated a likely reduction in rates as inflation decreases; however, the pace is expected to slow. The minutes also noted potential inflationary risks due to proposed trade taxes and deportations, although uncertainty surrounding these policies suggests they are not yet central to the Fed's deliberative process.
Where it sits in our coverage
Our consensus target for the relevant pair is set at 1.075 with a range spanning from 1.04 to 1.12. Key targets from notable firms include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's view aligns with jpmorgan's target near the upper end of the range. This suggests a more cautious approach to trading might be warranted as other firms show more conservative estimates relative to the Fed's evolving messaging.
How other firms see it
Most firms appear to echo the cautious sentiment, with jpmorgan aligned on this outlook. Conversely, bofa reflects a more bearish stance on the potential trajectory of interest rates and economic conditions.
This sentiment has broader implications for the USD, particularly against other currencies sensitive to U.S. economic policy changes. Observers should also consider the behaviour of the EUR/USD trajectory, which is closely tied to Federal Reserve actions and inflation expectations.
Market Implications
For traders, closely monitoring the implications of U.S. inflation data as it relates to Fed policy will be crucial, particularly with the upcoming speeches from Federal Reserve officials. Watch for any sudden shifts in market sentiment, particularly if new data points emerge that could influence the expected pace of interest rate decisions.
From the original
The Federal Reserve meeting minutes reflect the rather chaotic swings of view that occur under Fed Chair Powell. After an emergency rate cut without an emergency in September, the Fed has moved to slowing the pace of rate cuts being “appropriate” in December. The basic idea is un
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Per the full note [source], UBS Chief Economist Paul Donovan argues that the FOMC meeting minutes and Fed Governor Waller's speech are the key events today, with the market focused less on the current economy and more on political uncertainty in 2025. Donovan expects inflation to moderate in H1 2025, allowing the Fed room to ease, but sees political risks to inflation as a later concern. The desk's base case is that the Fed will cut rates in the first half of the year, though internal Fed divisions add nuance. This view aligns with a modestly bullish USD stance near term, but the broader path hinges on political developments.
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