Top of the Morning: U.S. macro update & FOMC takeaways

Hi everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.

Our conversation today will focus in on a U.S. macroeconomic update, including some timely takeaways from the December FOMC meeting. With that, joining us for today's conversation, glad to welcome back from the UBS Chief Investment Office, Asset Allocation Strategist Paul Hsiao. Paul, thank you for joining us here on this Thursday morning.

Welcome back and looking forward to our conversation today. Good to be here. Thanks, Dan.

So Paul, as mentioned, timely that you're joining us as we are fresh off of the December FOMC meeting. We did see that the Fed cut rates by 25 basis points as CIO expected heading into the meeting, though I'm curious, what are your overall takeaways from the meeting? And can you remind us of CIO's expectations for monetary policy now as we're heading into 2026?

Certainly, I think going into this meeting, a lot of the investors and market watchers looking at what's coming out from the Federal Reserve expected sort of a hawkish cut. What I mean by that is they expected the cut of rates, but for guidance to be a little more hawkish than usual. And I think we more or less got that.

We had that rate cut as expected by CIO to the range of 3.5 to 3.75 percent. But it does seem that from the press conference and from the statement, Chair Powell noticed that policy rates were within a range of plausible estimates of neutral, meaning that some members of the FOMC consider that policy to be right around where the economy is not too – where policy rates are not too tight and not too loose. And I think that's quite important, because this year the Fed is kind of operating on a tightrope where it has to balance the weakness of the labor market, where you'd start cutting rates with inflation still rather elevated, and for the impacts of tariffs, the higher inflation impact of tariffs, really kicking in in the second half of this year and possibly filtering in to the first half of next year.

So you have an elevated inflation horizon, which prevents rate cuts. So far they have seemed to err more on the growth supporting side with the rate cuts supported so far this year, and the couple penciled in for next year. But it does seem that the bar for further rate cuts has moved higher.

Additionally, following some statements at the Federal NQT, I thought it was interesting that in the statement they mentioned that the Treasury needed to maintain an ample supply reserve and would consider buying U.S. Treasuries at $40 billion a month. Perhaps the last thing I'll note about the Fed meeting is that there were signs of dissent, both on the more dovish side and then on the more hawkish side.

We had some two dissents, President Schmidt and Goolsbee, arguing for no cuts in the December meeting, showing how even within FOMC board members, that the bar for more rate cuts seems to be higher. But Governor Myron favored a larger 50 basis for the rate cuts. And as many market watchers would know, the recent appointee from the White House, which is aligned for a more dovish point of view.

Now, against that policy backdrop, Paul, as we're speaking here roughly mid-December, how would you characterize the health of the U.S. economy? What would you identify perhaps as being some points of strength and strain? Right.

So, you know, really starting Q4, it was a pretty robust economic environment. And you had the Atlanta GDP tracker showing Q3 GDP anywhere between the range of 3.5 to 4 percent. So that's really, really strong for Q3 GDP, especially given a more ho-hum that was largely affected by large tariff swings.

However, we did have the government shutdown, which was pretty lengthy, that resulted in a lot of data releases being either canceled or delayed, including the Q3 GDP report. So a lot of market watchers and even Fed participants feel like they're operating in a fog, and that prompted that notable comment from Jay Powell during one of his press conference meetings about how it's difficult to change policy right now when you're operating in this sort of fog. So we have relied on more private sector measures of the economy, whether it's through consumer confidence, the ISM PMI manufacturing, or even ADP payrolls.

And what we do see is that at least the services side of the economy in the U.S. is still pretty robust. So I think that Q3 GDP does look pretty solid. But the notable point of weakness is the labor market.

So we do hear anecdotally from headlines it's harder for new grads, new entrants to the workforce trying to find a job. We also are seeing in the headlines more job loss announcements. But if you look at even private payrolls, that's the first negative print since 2020.

Certainly no economic metrics once compared to the really disastrous time in 2020 when you had the start of the lockdown. And overall, other labor market indicators show signs of cooling. And earlier, I think today, we had initial jobless claims sort of spike up as a measure of the newly unemployed into the labor market.

So that's something that's quite concerning and something that the Fed certainly is watching out for, and I think is the genesis or at least the big driver behind its rate cuts. The weak labor market necessitates more rate cuts, and that's why we expect at least one more rate cut in 2026. And sticking with the data calendar, next week's economic data calendar, quite substantial, which does include some data backlog held up during the government shutdown.

What will you be watching out for, Paul? Right. So we're supposed to get a number of data releases, some very important ones, such as personal income, personal spending, which helps us gauge the health of the consumer, as well as PCE core prices, which is another gauge of inflation.

But a lot of these indicators are largely backward-looking, either September or October. You will really start to get some of the more higher frequency or the more recent data releases I think we'll get towards the one key one we're looking out for is the change in nonfarm payrolls, since we haven't gotten jobs data for the last two months. The consensus is expecting a pretty modest gain of $50,000, but if it goes negative, I think that increases the chance of further pressure for the Fed to cut rates in its upcoming meetings.

In addition to that, I think, aside from the data releases, there are, I think, pretty significant developments on the policy front. First of all, the announcement for the new chair. First, the White House promised that it will announce by Christmas.

It does sound to be in the next couple of weeks, whether it's Christmas or by the end of January, it does seem that the White House is gearing up for that announcement. It seems that Hassett is on the front-runner instead of Walsh, who seems a little more, let's say, politically aligned with the White House and largely dovish, although given the constraints about inflation, that's something that whoever is the new Fed chair has to contend with, but certainly that's something that markets are watching out for. And secondly, any movement on tariffs, whether it's any development on deals, any announcements of new tariffs, but I think one thing that the market is particularly watching out for is for the Supreme Court to reveal its decision on the legality of much of the IEPA tariffs, because if those are struck down, then I think that's a pretty significant reduction of the effective tariff rate.

We expect it to go from around 16% to perhaps 10% if the legal basis for a lot of these tariffs are struck down. So, in addition to these data releases, we have two pretty significant, I think, policy developments to be announced with the new Fed chair, as well as any movement on the tariff front that markets are watching out for. Well, very insightful, Paul, as always.

Thank you for dropping by Top of the Morning for this health check on the U.S. economy and for those timely takeaways from the December FOMC meeting. Great catching up with you, as always, and look forward to picking back up with our conversation again soon. Thank you very much, Dan. along with our video offerings, such as UBS Trending.

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