Top of the Morning: FOMC - Warsh signals a period of watchful thinking
The desk interprets the recent FOMC meeting led by Chairman Kevin Warsh as signaling a cautious stance rather than an aggressive tightening of monetary policy. Per the full note source, the inclusion of three hawkish dissents from regional presidents highlights internal divisions, yet the smaller changes in the policy statement suggest a preference for maintaining the status quo. While the market had anticipated a more hawkish shift, the absence of aggressive language may ultimately shape positioning in the USD pairings as traders digest these nuances. With no immediate high-impact events in the calendar, these insights position the FX market for careful monitoring of sentiment shifts.
What the desk is arguing
The desk asserts that the FOMC's recent communication reflects a period of 'watchful thinking' rather than a shift to a more hawkish policy stance. Andrew Dubinsky from UBS emphasized that while there were notable dissents at the meeting, the committee ultimately refrained from altering the overall tone of the statement. This suggests that despite some desire within the committee for tighter policy, there is significant caution regarding the economic outlook.
The presence of three dissents at the meeting—consistent with prior assertions from the regional presidents advocating for hikes—indicates underlying divisions on the committee. However, the unchanged language suggests a reluctance to appear overly aggressive, given current market conditions and uncertainties related to inflation and growth.
Where it sits in our coverage
Our consensus target for USD/EUR is currently set at 1.075, with a range between 1.04 and 1.12. Notable institutional targets include the following: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This perspective aligns with jpmorgan's targets at the higher end of the spread, indicating a cautious optimism towards the dollar amid a carefully monitored policy environment.
How other firms see it
Many firms appear aligned with this cautious outlook, particularly jpmorgan, which emphasizes a gradual approach to any potential rate adjustments. Conversely, bofa suggests a more conservative position, advocating for lower targets in response to global economic pressures.
Market pairs like EUR/USD will be critical as they reflect the Fed's stance against other central banks, especially with the ongoing developments in monetary policy. Observers should also note how these dynamics play out in relation to the USD/JPY as a reflection of risk sentiment in broader markets.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01FOMC remains cautious with minor changes in policy outlook.
- 02Three hawkish dissents reflect internal disagreements.
- 03Market reaction indicates a wait-and-see attitude on rate hikes.
- 04No immediate high-impact events to influence trading direction.
Market implications
Traders should watch the USD/EUR specifically around the 1.075 level as indications of sentiment shifts materialize. Positioning around this level could shift based on evolving interpretations of Fed communications and potential future adjustments to monetary policy.
Risks to this view
A significant change in the upcoming economic data or unforeseen shifts in inflation rates could derail the current projections, leading to more aggressive rate hike expectations that would alter trader sentiment towards the dollar.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Today we are going to spend some time reviewing this week's FOMC meeting, the statement, the policy decision, and of course, the press conference Q&A session with Fed Chairman Kevin Warsh.
Joining me right here in studio at 1285 in Midtown Manhattan, glad to welcome back U.S. economist from the UBS Chief Investment Office, Andrew Dubinsky. Andrew also released a blog on this very topic, which is now available up on ubs.com slash CIO. The title, Warsh signals a period of watchful thinking.
So we'll spend some time today digging into the blog and hearing Andrew's reflections on the meeting. First off, Andrew, great to have you back here in studio. Thank you for dropping by on this Thursday morning.
Oh, yeah. I love to be here in person with you. So I'm looking forward to this.
Definitely. So let's begin simply, Andrew, by hearing your thoughts and reflections on what the statement delivered and what we heard from Chairman Warsh during yesterday's press conference. Yeah.
So I'll break it up into two parts. First, we got the statement and there were little changes except for the notable inclusion of three hawkish dissents going into the meeting. There were a lot of expectations that there could be some dissents.
And we saw that kind of uncertainty also coming in the meeting reflected in the pricing of the July rate forwards. And it was not, I would say, a surprise who dissented. The three regional presidents had dissented in April in a hawkish direction.
And we can infer from their communication that they favored hikes and they were part of the group of people submitting dots having hikes in 2026. So other than that, there was really little changes to the statement. And the news that you could take away from no changes is that there were opportunities to change a statement in a hawkish direction and they opted out of doing that.
So I'd say on net, given who dissented and the lack of changes, it was marginally a dovish surprise. And I think that set up things for the press conference where Warsh didn't really say anything that was notably hawkish. And if anything, if I had to say the themes more aligned in a dovish direction.
It was interesting heading into the policy decision release, the market perhaps suggesting that we would see a rate hike. That, of course, was not the base case of CIO. But the market response to the statement, the Q&A was notable yesterday, especially on the equity side.
What did you take away from how the markets responded? I think the initial response to staying on hold, not really changing anything in the statement notably, made sense. And then his additional comments on particularly flagging how financial conditions had tightened and that kind of gave the...implicitly was saying substituted for tightening that they might have to do.
So those kind of gave, I'd say, a dovish tone that there really wasn't an urgency to do anything. He also used the words patience a few times. He described this as a period of watchful thinking.
So I think it made sense that we saw the December Fords remove roughly half a hike more in line with our view that they stay on hold this year. But I think one part of the market reaction that was probably not welcome is that you saw longer maturity rates sell off. So you saw the 30-year yield move by 10 basis points or more.
And when you look into the composition of those yield increases, there's a lot coming from breakeven inflation. So you can infer from that that the dovish tone today might have come at the expense of future credibility. And I think that credibility uncertainty was a factor for why the long-end bonds sold off and as well as why equities seem to sell off as well.
More in response, I think, to his press conference. As far as the road ahead for monetary policy, as we begin to wrap up, Andrew, talk to us a bit about CIO's expectations for the balance of 2026 and perhaps even beyond that. Right.
So I'd say the key thing that we're watching for our on-hold view for the rest of the year is just, does inflation slow down? We're right now, we just got inflation data today. The most important indicator, core PCE, it slightly decelerated to 3.3%.
And the key thing is we expect this to continue to edge lower slowly and expect those monthly prints to be much more consistent with being near the inflation's target. And so if that view plays out in the next few months and throughout the rest of the year, we think the Fed can stay on hold. Now, the risks are, inflation risk is clearly skewed to the upside.
There's a couple of supply shocks the US is still going through. We have the Middle East conflict that's still quite live. We have the prospect of possibly new tariff policy changes.
And we still have a fair amount of AI demand inflation. So those three things could derail the slowing in inflation. So those are what we're watching.
And I'd say the news today is supportive of our call, but we're going to be watching that inflation data with, I think, as the Chair said, with a laser-like focus. And we'll see what happens from there. And obviously, we'll have to closely watch whether there are a bigger break in the inflation expectation data.
I think yesterday's move was small in terms of what we would need to see for it to really pressure the Fed to do something. But if it really started to move, I think that would be another factor that could come into consideration for possibly tightening the policy. Well, Andrew, thank you for dropping by on this Thursday morning post the Fed meeting.
Very timely to hear your thoughts, reflections, takeaways from the statement, the press conference, hearing your thoughts on the market response and CIO's expectations for the road ahead for monetary policy. More conversations to come. Thank you again, Andrew, for joining us today.
Yeah, it's always my pleasure. Thank you for tuning in. Be sure to visit ubs.com slash studios to view the entire UBS Studios suite of podcast channels, along with our video offerings, such as UBS Trending.
You can also follow us on Instagram for content highlights at UBS Trending. UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit ubs.com slash CIO to view the latest research.
UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management business of UBS AG or its affiliate UBS. This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is published for informational purposes only. As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services.
Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. For information, please visit our website at ubs.com forward slash working with us.
For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at ubs.com forward slash CIO dash disclaimer.
Sources & References
How we cover this story