UBS On-Air: Paul Donovan Daily Audio 'Affording prices'
The desk's interpretation hinges on the rising political scrutiny of the Federal Reserve and the implications for US monetary policy. Specifically, Republican senators' dissatisfaction with the Department of Justice's investigation may delay the confirmation of the next Fed Chair, emphasizing the need for any nominee to show independence from political pressures, as outlined in the UBS report source. Furthermore, there's a looming concern about rising inflation amid ongoing trade policy volatility, which could further complicate investment and hiring decisions for US businesses. This backdrop suggests a heightened risk premium in the market as uncertainty persists around future monetary policy directions.
What the desk is arguing
The current political climate around the Federal Reserve, specifically the DOJ's investigation, is likely to slow the confirmation of the next Fed Chair. Per the full note source, Republican senators' concerns could mean that any nominees would need to strongly assert their independence from political influences, potentially impacting the Federal Reserve's operational autonomy.
This situation is compounded by President Trump's recent comments regarding a 25% tax on imports from countries conducting business with Iran, which raises questions about US trade policy's stability. Inflation data due soon may not improve the ongoing affordability crisis, and businesses are still constrained by uncertainty related to trade and monetary policies.
Where it sits in our coverage
The consensus target for USD/EUR currently stands at 1.075, with a range between 1.04 and 1.12. Notably, firmId forecasts suggest: - jpmorgan: 1.10 (Mar-26) - bofa: 1.04 (Mar-26)
This view suggests a divergence, with our desk's interpretation leaning towards the upper end of the forecasted range, considering the ongoing dialogue around inflation and Fed policy.
How other firms see it
Aligned firms like jpmorgan and barclays share a similar outlook on USD/EUR valuations, while bofa posits a more cautious stance. As political dynamics evolve, particularly with monetary policy under scrutiny, watch USD/JPY for broader implications on risk sentiment and safe-haven flows.
What the calendar says
Upcoming US consumer inflation figures will be pivotal, especially as they’re expected to speak to the ongoing affordability crisis. With the data on the 14th, it could significantly influence market perceptions regarding the Federal Reserve's next steps.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Political scrutiny of the Fed may delay upcoming Chair confirmation.
- 02Inflation figures are expected to maintain pressure on affordability.
- 03Uncertainty in trade policy impacts business investment decisions.
- 04Markets are bracing for potential volatility in response to these developments.
Market implications
Traders should monitor the upcoming CPI data release, as higher-than-expected inflation could shift market expectations regarding Fed policy tightening. Additionally, any statements or actions from Congressional leaders concerning the Fed's independence could serve as critical indicators of market sentiment.
Risks to this view
A reversal in sentiment could occur if the DOJ investigation yields no substantial findings, thereby alleviating concerns over Fed independence. Additionally, if trade policy becomes more predictable and stable, reducing the risk premium, it could lead to a more bullish outlook for investment.
Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Tuesday the 13th of January.
The political reaction to the US Department of Justice investigation of the US Federal Reserve and its chair has possibly changed the narrative somewhat on the future course of US monetary policy. Republican senators seem to be unhappy with the probe and there is a strong likelihood that this will delay the appointment of a new Fed chair later this year. There is also increased probability that anyone nominated by US President Trump will have to work extra hard to demonstrate their political independence for fear of being branded a political stooge.
Trump posted on social media last night suggesting a 25% tax on US purchases of goods from anyone who does business with Iran. There are no details and this may well just be ignored but if Trump actually meant what was posted, US buyers of goods from China, India, the European Union and Turkey, amongst others, will have to find another 25%. From an economic perspective, this is another example of the somewhat random and unpredictable nature of trade policy at the moment, even overlooking the possibility that the tariffs are then declared illegal.
That uncertainty adds a risk premium for US businesses and that risk premium has been acting as a constraint on investment and hiring plans over the last year. The hope was that this uncertainty risk would fade in 2026 as companies adapt to the new policy regime. US consumer price inflation for December is due and it is not expected to improve the affordability crisis narrative.
Inflation may tick up slightly in year-on-year terms. Some of this increase reflects the fact that the November numbers were pushed lower by poor data collection owing to the government shutdown. Data collection is still a problem generally.
Cost constraints and reduced staff numbers means that the Bureau of Labour Statistics has been forced to sample fewer prices in fewer cities this last year and it's guessing at more and more price levels overall. However, the shutdown-related technical factors should now fade from the picture and that will add to the reported headline inflation rate. It is important to emphasise that the November disinflation forces were not actually experienced in the real world and it is the perceived experience that matters to the affordability narrative.
Food prices and electricity pricing have achieved political sensitivity as drivers of the perception of an affordability crisis. Increasing prices should help mitigate that concern but at the moment the narrative is still a higher cost of living rather than a lower one. The UK's British Retail Consortium same-store sales data grew 1% on the year.
Sources & References
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