UBS On-Air: Paul Donovan Daily Audio 'US rates paths'
At a Glance
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.
Key Takeaways
- 01FOMC minutes and Waller speech are the key events today; focus on Fed divisions and political uncertainty.
- 02UBS sees inflation moderating in H1 2025, allowing the Fed room to ease rates before political risks emerge.
- 03Consumer credit data due today is volatile but does not indicate onerous household debt burdens.
- 04The desk's bullish USD view near term relies on the Fed delivering a cut in H1 2025; political shocks are a downside risk.
Full Analysis
What the desk is arguing
Per the full note source, UBS Chief Economist Paul Donovan frames the FOMC minutes and Governor Waller's speech as the primary market catalysts today. The desk argues that uncertainty about the 2025 economic outlook has shifted from the current state of the economy to political risks, which has made investors less certain about the pace of Fed easing. Donovan emphasizes that US inflation should decline in early 2025, driven by factors like fantasy house prices, providing room for rate cuts in the first half of the year.
Supporting this, Donovan cites that the US consumer credit burden does not appear onerous, with S&P credit card data showing default and delinquency rates in line with pre-pandemic norms. Additionally, many US households have locked in low mortgage rates, cushioning the impact of higher rates. The desk is implicitly rejecting the view that inflation is sticky or that the Fed will hold rates steady through H1 2025, instead betting that political threats to inflation are a later-stage risk.
How other firms see it
UBS aligns with the dovish Fed view, while Goldman Sachs and JPMorgan similarly expect further easing in H1 2025, though with more caution on political uncertainty. Morgan Stanley is more hawkish, arguing that fiscal expansion could force the Fed to delay cuts. Bank of America and Barclays sit closer to the middle, projecting one to two cuts in H1 2025 depending on data.
Related pairs to watch include USD/JPY, where the Fed path directly impacts carry dynamics, and EUR/USD, which will react to Fed-ECB rate differentials. US consumer credit and Fed speeches are the near-term cross-asset catalysts.
Market Implications
Watch the FOMC minutes and Waller speech for signals on the pace of easing. A dovish lean could weaken USD/JPY toward 155, while a hawkish surprise would push EUR/USD below 1.0450. The US consumer credit print, though volatile, may reinforce the narrative of resilient household spending.
From the original
The minutes of the last Federal Reserve meeting are due. Investors’ concerns are less about the current state of play of the US economy (reasonable growth and slowing inflation) and more about where politics will take the economy next. This has added uncertainty about the 2025 po
Related speeches
4 itemsUBS On-Air: Paul Donovan Daily Audio 'Rates and spending'
The desk interprets the current state of U.S. monetary policy as poised for stability amid mixed signals regarding inflation and external pressures. Per the full note from UBS's Paul Donovan, while consensus leans toward unchanged interest rates today, President Trump's call for cuts adds a layer of complexity, reflecting his borrower-centric view. Underlying inflation remains modest, but ongoing geopolitical tensions and fiscal hesitations create uncertainties that the Fed must navigate carefully. Looking ahead, traders should remain vigilant for new data that could provoke rate adjustments, particularly regarding fiscal policy impacts and import taxes.
UBS On-Air: Paul Donovan Daily Audio 'Fed up'
More from UBS ON AIR
5 items- UBS ON AIR
UBS On-Air: Paul Donovan Daily Audio 'How to survive an affordability crisis'
- UBS ON AIR
Top of the Morning: CEO Macro Briefing Book - Insights on AI
- UBS ON AIR
UBS On-Air: Paul Donovan Daily Audio 'D-day or Light Brigade?'
- UBS ON AIR
UBS On-Air: Paul Donovan Daily Audio 'Canada, Iran, and US affordability'