UBS On-Air: Paul Donovan Daily Audio 'The Fed will cut, stay unchanged, or raise rates'
At a Glance
Per the full note , the Fed minutes revealed a surprisingly broad range of views, including explicit mention of rate hikes, which markets had not priced. The desk highlights that this hawkish tilt reduces the probability of near-term cuts, but the overarching caveat—dependent on inflation persistence—preserves optionality. With two-year yields edging higher and the labour market deemed stable by most members, the near-term path is data-dependent rather than directionally clear.
Key Takeaways
- 01Fed minutes revealed a full range of views, including rate hike advocates, a hawkish surprise.
- 02Two-year yield rose modestly, reflecting a repricing of near-term rate probabilities.
- 03Labour market stability and firm adaptation to policy uncertainty reduce urgency for cuts.
- 04Near-term rate path remains data-dependent, with hikes conditional on persistent inflation.
Full Analysis
What the desk is arguing
The Fed minutes from January showed the widest range of opinion in recent memory, with some members advocating cuts, others a long pause, and even the possibility of hikes—the latter a clear hawkish surprise relative to market expectations. The desk frames this as a deliberate effort by the Fed to keep all options open, but the mere mention of rate increases pushes the burden of proof for cuts higher. The two-year yield rose modestly post-release, confirming the market repriced probability of a hike, albeit without alarm.
The support for this hawkish shift comes from the minutes' description of the labour market as 'more stable', with firms learning to adapt to policy uncertainty—a dynamic that could sustain hiring and keep wage pressures from abating quickly. The counterfactual the desk is implicitly rejecting is that the minutes' diversity of views signals genuine dovish lean; instead, the hawkish mentions dominate the tone shift.
Market Implications
Watch for further steepening of the front-end US yield curve if inflation prints stay elevated, and monitor USD/JPY for spillover from Fed hawkishness vs BoJ dovishness. A break above 1.08 in EUR/USD would require a clear absence of tariff escalation; the minutes push that barrier higher.
From the original
The Federal Reserve’s meeting minutes showcased a full range of opinion, with advocates of rate cuts, a long pause, and the possibility of rate increases. Were it not for the inability of the minutes to spell the word “labour” correctly, this level of disagreement would give the
Related speeches
4 itemsFed minutes lean hawkish, but we don’t expect a hike
The Fed's July FOMC minutes, while appearing somewhat hawkish with three members calling for an immediate hike, ultimately support a more dovish trajectory going forward, given the prevailing weak economic indicators. Per the full note from ing-think, despite concerns over inflation and its recent upward pressures, the overall sentiment amongst committee members seems to favor a cautious approach. The broader context reflects a balancing act between inflationary risks and a softening labor market, suggesting the likelihood of further rate increases is being tempered by current economic realities. With no significant macroeconomic events on the horizon, traders should remain vigilant about upcoming labor and inflation data that could signal shifts in the Fed's policy stance.
Why we don’t think the Fed will hike rates
The desk believes the Federal Reserve is unlikely to hike rates based on the diverging perspectives within the FOMC and a favorable inflation outlook over the next year. Per the full note by James Knightley, the Fed's dual mandate of maximizing employment and maintaining price stability requires a cautious approach, especially given the current softness in job creation and the housing market. Despite a hawkish tone from half of the FOMC members, the remaining members' skepticism coupled with improving inflation metrics supports our stance for a lengthy pause in rate hikes. The consensus within the market is significantly swayed by these internal dynamics as investors currently anticipate a 25 basis point hike by October 2026 but our position emerges firmly on the side of inaction.