UBS On-Air: Paul Donovan Daily Audio 'A reluctant defense of Powell'
Despite recent uncertainty surrounding US monetary policy, the desk supports a defense of Jay Powell's leadership at the Federal Reserve, a view articulated by UBS Chief Economist Paul Donovan. Donovan argues that the appointment of Powell marked a missed opportunity for monetary policy, suggesting that former chair Janet Yellen would have been better suited to navigate current challenges (particularly in labor markets and data quality). Per the full note source, he identifies Powell's lack of a medium-term vision as detrimental, leading to an increased emphasis on data dependency that is becoming increasingly unreliable, thus raising risks of policy missteps.
What the desk is arguing
The desk posits that central bank leadership, particularly under Powell, is crucial amid the economic uncertainties wrought by long-term structural changes. Furthermore, Donovan emphasizes that having a clear medium-term vision would mitigate market volatility, enabling stakeholders to make more informed decisions in the face of unpredictable data quality.
Evidence of the growing volatility and uncertainty in bond markets is apparent as the data quality has been deteriorating for years—raising substantial questions about the Fed's reliance on this backward-looking data. According to Donovan, failure to recognize this and adapt will only exacerbate financial risks. His commentary stresses the urgency for the Fed to assert its independence to maintain market confidence.
Where it sits in our coverage
Our models lean towards bullish positioning with a target of 1.075, within a range of 1.04 to 1.12. Notably, jpmorgan sets a target of 1.10 for Mar26, while bofa projects a lower target at 1.04 for the same tenor.
The desk's view aligns closely with JPMorgan's outlook, which underscores the importance of confidence in Powell's ability to steer monetary policy independently amidst external pressures. Our call leans towards the upper bound of expectations, indicating a belief in market stabilization around Powell's current policy framework.
How other firms see it
Opinions vary among institutions; jpmorgan and goldman appear to support the notion of maintaining the Fed’s independence while expressing concerns over data vulnerability. Meanwhile, bofa expresses skepticism about Powell's current policy trajectory, leaning towards a more cautious outlook based on anticipated economic weakness.
Watch related implications surrounding USD/JPY, as the divergence observed between Fed signals and Japanese monetary policy may create spillover effects in currency markets and yield curves, impacting volatility expectations.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Support for Powell's leadership amidst criticism highlights broader confidence issues in monetary policy.
- 02A lack of a clear vision risks increasing volatility and market uncertainty.
- 03Concerns around data quality undermine the effectiveness of the Fed's current policy approach.
- 04The necessity of central bank independence is pivotal for fostering market confidence.
Market implications
Traders should monitor the USD's strength against major currencies, particularly pairing with JPY and EUR, given the potential for divergence in central bank policies. Powell's upcoming speeches may provide further direction on the Fed's commitment to independence and medium-term strategy.
Risks to this view
A significant shift in perceived political influence over the Fed could undermine Powell's credibility and lead to increased market volatility. Sudden changes in economic data that conflict with Powell's outlook could also chip away at market confidence, driving investors to adjust their positioning dramatically.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Friday the 22nd of August. Ahead of their speech at the Jackson Hole summer camp for central bankers, I find myself in the uncomfortable position of supporting US Federal Reserve Chair Powell.
In my view, US President Trump's appointment of Powell as Fed Chair was an error of judgment. In the circumstances, it would probably have been better for former Fed Chair Yellen to serve an extra term. The structural changes in the labour market and the difficulties in measuring that was something Yellen would have been very well placed to handle.
Powell has seemed insecure in their speeches and policy views, and has never presented an ideological medium-term framework for policy. During the most dramatic structural upheaval in the global economy for over 250 years, the inability to articulate a medium-term vision is problematic. This has led to the mantra of data dependency, a backward-looking idea at the best of times and one that has become increasingly unreliable as data quality has deteriorated.
The growing problems of data quality have been known about for 15 years or more, and glaringly obvious for 10, so chaining policy to data dependency at this point risks policy error and adds unnecessary volatility to financial markets. In Powell's defence, they have never been a political stooge. Their policy approach may be flawed, but the Federal Reserve has remained independent.
The appearance today is that there is now a deliberate political assault on the independence of the US central bank. It does not matter whether or not this is the intention. In modern economics, the appearance of independence is required to maintain the confidence of financial markets.
If this perceived political assault continues, bond markets will require an inflation uncertainty risk premium, raising the real cost of borrowing for the US government and large companies. It will make the unsustainable US fiscal position even more unsustainable. Today's Jackson Hole speech by Powell is on the economic outlook.
It might conceivably offer a medium-term vision, although it's probably too late for that to have any meaningful impact. What is to be hoped is that regardless of the near-term signals the speech delivers, the remarks also offer a robust defence of central bank independence. Japan's nationwide consumer price inflation offered no surprises really in July.
The internationally defined core measure of inflation remains at 1.6% on the year with no change on the month. This is one of the lowest core inflation rates in the advanced economies. Headline inflation slowed too, though it's still technically above the Bank of Japan's target.
In the United Kingdom, the GFK consumer confidence data improved very slightly. This is a good example of the problems of sentiment polls. The UK has been the strongest performing G7 economy this year so far, but the media cycle has been keen to put a negative spin on things.
It's the spin, rather than the substance, that tends to influence sentiment surveys. German final second quarter GDP data was released and, rather unusually, revised slightly lower. German data does tend to be revised stronger.
Government spending was a key part of the German growth story. That's all for today. Have a good day.
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