Top of the Morning: FOMC reflections & US economic update
The recent FOMC meeting underscored a gradual approach from the Federal Reserve concerning monetary policy adjustments, with a clear divergence between improving economic conditions and inflation concerns. Per the full note from UBS, economist Andrew Dubinsky emphasized that although the Fed's decision to hold rates steady was anticipated, the constructive outlook on economic growth set the stage for future gradual policy recalibrations. This forward guidance aligns with our view that any tightening will be cautious and well-telegraphed to avoid market volatility, as shown by the Fed’s nuanced changes in their statements. Observing current economic growth at robust levels, the market will remain sensitive to inflation data as a catalyst for future shifts in policy direction.
What the desk is arguing
The desk interprets the FOMC's recent hold on rates as a signal of a measured path ahead, emphasizing a need for sustained economic momentum before potential future hikes. Per the source commentary, the Fed's language pointedly acknowledged the strong pace of economic activity, echoing the positive GDP data released concurrently, which indicated a growth rate of approximately 3.8% for Q3. Despite mixed inflation indicators, the focus remains on gradual adjustments in policy rather than aggressive shifts.
The expression of discontent by certain members regarding the inflation outlook reflected a balance between caution and assertive policy stance, suggesting that the Fed has managed to navigate internal dissent while signaling a focus on overall economic health. Should inflation metrics show persistent volatility, adjustments to this outlook may need to be recalibrated, but for now, the Fed’s guidance is steady.
Where it sits in our coverage
Our consensus target for the USD/EUR is currently set at 1.075, with a range spanning from 1.04 to 1.12. Notable firms contributing to this forecast include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This outlook reflects a mix of expectations across the board; however, the desk's positioning is aligned towards the upper end of this spread, acknowledging that stronger economic signals and Federal Reserve communications support a firmer dollar stance in the near term.
How other firms see it
Firms such as jpmorgan and citi share a similar outlook, favoring a moderate approach to rate adjustments, while bofa remains more cautious, highlighting risks associated with potential economic downturns. Divergent views reflect disparities in inflation expectations and growth forecasts.
Given the monetary policy implications, keep an eye on USD/EUR trends as they may mirror the anticipated Fed decisions. The interplay between these perspectives can influence other pairs, such as USD/JPY and GBP/USD, as market sentiment evolves around U.S. economic health and Fed policy signals.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01FOMC's recent hold indicates a focus on gradual policy adjustments.
- 02Robust Q3 US GDP growth at 3.8% influences the Fed's outlook.
- 03Dissension among Fed members about inflation suggests potential future policy shifts.
Market implications
Traders should pay close attention to any shifts in inflation data as a crucial market catalyst. A significant breakout from the current USD/EUR level near 1.075 could signal a shift in sentiment, particularly if economic indicators align favorably with Fed communications.
Risks to this view
Should inflation show unexpected resilience or escalate beyond tolerable levels, the Fed may need to pivot more aggressively than anticipated. This would invalidate the current outlook and could lead to rapid changes in exchange rates across various currency pairs, including a stronger dollar against the euro.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves Podcast channel for today, a timely episode as we will reflect on this week's outcome of the October FOMC meeting. And joining me for the conversation, glad to welcome back to Top of the Morning from the UBS Chief Investment Office.
In UBS FSI, we have Andrew Dubinsky, U.S. Economist. Andrew, great to have you back here on Top of the Morning.
I know headed into this week's policy meeting, there was much anticipation over the provision by the FOMC of any clarity on the path forward for rates. Here at the start, Andrew, I'm curious as to what are your takeaways from the October meeting, the press conference, anything in particular that stood out to you? As you noted, there was a lot of anticipation for this meeting, not necessarily over the decision, but what kind of clues we would have for the path of rates going forward.
So we got a hold, not a surprise, and we had some changes to the statement that indicated the Fed interprets the economic activity as going at a pretty strong pace. That makes sense given with what we've seen in the first half of the year and today's growth data. But putting it down still is noteworthy.
And we did get dissents, a couple in favor of a hike. That wasn't a surprise. Maybe who dissented was a little bit of a surprise.
But I think the main point was that Walsh didn't really spend a lot of time on the bad inflation data. He really leaned into some of the positive improvements since the hike in September and was really guiding, I think, the market to expect gradual policy adjustments and not a very large policy cycle. So it really was consistent with our view that we're going to have a gradual recalibration.
He really wouldn't provide much guidance for December. But our interpretation of the fairly broad support for yesterday's hold was that there was a compromise that people wouldn't dissent in exchange for having a high confidence that there would be at least a hike in December. So our view is still another hike in December and another hike in March because there's not a lot of new inflation data in between the December meeting to really derail the current situation where we have elevated inflation going into year end at slightly over 3 percent.
With the October meeting now behind us, Andrew, you outlined CIO's policy expectations from here in terms of the quantity of additional hikes, potential timing of them. Anything there you'd like to expand on? The main things that will influence the outlook for policy from here is just, and we heard the chair reflect on them in the press conferences, what do we see from financial conditions?
Do we see a large tightening that could possibly substitute for a rate hike in March or just having a smaller cycle? And just what do we see with the inflation developments? Do we see some at least improvements in the sequential prints after today?
Today's September reading was quite firm and the point is do we start to get a sense that the inflation is returning to target at a fast enough pace? So of course we're going to look at the financial conditions, inflation, and what's happening with those upside risks. Obviously we still have a pretty kinetic conflict in the Middle East and supply chain upside risks still seem quite relevant and haven't improved that much.
AI demand pressure still seem to be in focus. So there's a lot could change with those upside risks and right now they're not looking very favorable for at least a skew of risk for inflation. So those are the key things that we're going to be watching to see if our view possibly needs to be add more, another hike, or possibly remove one if financial conditions tighten enough elsewhere.
Just to focus in on the health of the U.S. economy and mindful of Election Day at this point as we're recording here on Thursday, October 29th, just days away, the health, the condition of the U.S. economy is of course top of mind for many voters. How do you assess, Andrew, the health of the U.S. economy today? I know we had a notable GDP print released just a few moments ago for Q3.
Yeah, there's really no way to avoid saying that. Just going, you know, growth is quite strong, you know, the first half of the year in the mid-2% range for growth and this third quarter we have the first estimate at about 3.4%, which is a little bit above the expectations. So it's pretty clear we have a backdrop with very strong private demand, both strong consumption and really strong business investment linked to the AI CapEx cycle.
Now going forward, our expectation is we do see some moderation in consumer spending because it has been growing at a faster clip than income, and we did see in some of the monthly data today some slowing in consumer spending, but we're not looking for a dramatic slowdown, but just something back closer to the 2% or so range. And then obviously we're going to be paying very close attention to the inflation trends, and right now those are still quite firm, at least on a year-over-year basis. But as we get into the turn of the year, some of those key supply shocks will have a one-year anniversary, so we'll have a one-year anniversary of the oil price shock, we'll have essentially a one-year anniversary of really big tariff inflation, and that should help year-over-year inflation rates come down to the mid-to-high 2% range as we get to the end of Q1.
So those are the key things we're looking for. Some moderation in spending and some disinflation getting closer to the target but still above it as we go into 2027 and the first part of it. Well, Andrew, as always, a very timely touch base coming off of these FOMC meetings, hearing your reflections on the October meeting outcome, CIO's expectations for monetary policy from here, and a timely health check on the U.S. economy.
So I thank you, Andrew, for dropping by today and do look forward to our next conversation. Thank you, Dan. Looking forward to it.
Please visit our website at UBS.com slash CIO dash disclaimer.
Sources & References
How we cover this story
Related news on this pair
Bank Stocks Are Having a Tough Time. This Analyst Is Betting on 2 Names.
European banks beat forecasts with third-quarter profit
Stronger eurozone bank earnings reduce recession risks and support EUR carry positioning, though lack directional guidance on rate expectations.
AI stocks haven't played by the normal valuation rules. Now that rates are higher, they may have to, says UBS
UBS caution on AI valuation sustainability in higher-rate regime pressures mega-cap tech, reducing carry appeal of USD-denominated growth assets.