UBS On-Air: Paul Donovan Daily Audio 'The Fed will cut, stay unchanged, or raise rates'
At a Glance
Per the full note source, 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 itemsWhy 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.
Top of the Morning: U.S. macro update & FOMC takeaways
The desk anticipates that the recent Federal Open Market Committee (FOMC) decision to cut interest rates by 25 basis points, as expected, signals a delicate balancing act between a weakening labor market and persistent inflation concerns. Per the full note [source], Paul Hsiao highlighted that the Fed now views policy rates as being near neutral, suggesting that future monetary policy will be cautious but needs to navigate complexities like elevated inflation influenced by tariffs. Given the current macroeconomic landscape and the Fed's tone, traders should be watchful of signs indicating the Fed's direction heading into 2026, particularly when interpreting labor market data against inflation indices.
THINK Ahead: The case for rate cuts
The desk is positioning for potential rate cuts to re-enter the conversation sooner than expected. Per the full note from James Smith, the consensus among market participants seemingly discounts the prospect of easing until 2028; however, the desk believes this view underestimates the shifting economic indicators across the US, Europe, and the UK. With inflation remaining elevated at 4% and labor market recovery showing signs of faltering, there could be room for the Federal Reserve to pivot back to an easing policy next year. This contrasts with our internal coverage which suggests a focus on rate stability rather than cuts in the near horizon.
UBS On-Air: Paul Donovan Daily Audio 'Less urgency on US cuts?'
The desk interprets the Federal Reserve's recent decision to maintain interest rates as a tactical shift towards a more hawkish stance, despite future cuts still being on the table. Per the full note from UBS, persistent economic growth has diminished the immediacy of rate reductions, indicating that any future cuts may serve as insurance against potential economic downturns rather than as direct stimuli. Current market sentiment reflects a weakened US dollar, particularly in light of ongoing uncertainties in the labor market and external geopolitical pressures, such as those stemming from trade policies. In this environment, traders should remain vigilant as the Fed's deliberations on monetary policy are likely to influence dollar dynamics significantly.
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