UBS On-Air: Paul Donovan Daily Audio 'British style'
The desk interprets the Federal Reserve's recent rate decision as indicative of a more cautious and nuanced approach, reminiscent of the Bank of England's style. Per the full note source, the Fed cut rates by 25 basis points with a rare dissenting vote pattern reflecting internal complexities about future monetary policy direction. Concerns about inflation remain significant, and while December cuts aren't off the table, Powell's commentary hints at a more measured outlook.
What the desk is arguing
The Federal Reserve's recent decision to cut rates by 25 basis points may signal a shift towards a more cautious monetary policy. This aligns with the complexities observed in the dissenting votes, one favoring a larger cut and another advocating for no change, which echoes the Bank of England's voting dynamics. Per the full note source, Powell emphasized that a December cut is not guaranteed amidst inflationary pressures that are causing concern among policymakers.
Significant data points reflect that while inflation remains a priority, the Fed's decision was largely influenced by the fragile state of the US labor market. The decision to end Quantitative Tightening by December suggests that liquidity in the economy is being carefully managed. This indicates that the Fed is not merely accommodating, but actively seeking a balance in liquidity supply and demand, highlighting the current economic complexities.
The alternative read would consider a more aggressive monetary easing approach if economic conditions worsen, specifically if inflation shows signs of persistent decline or labor market indicators such as unemployment begin to rise significantly.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed's 25 basis point cut mirrored by a rare dissenting vote, indicating internal policy complexity.
- 02Concerns about inflation discussed, causing hesitation towards a rapid December rate cut.
- 03End of Quantitative Tightening expected to maintain balanced liquidity, rather than imply direct accommodation.
- 04Potential for future cuts remains tied to evolving economic indicators, particularly labor market dynamics.
Market implications
Traders should monitor the USD dynamics, particularly against major pairs that may react to Fed signals like USD/EUR. Key resistance levels have appeared near 1.075, coinciding with market positioning leading up to potential further actions by the Fed.
Risks to this view
A reinvigorated inflationary landscape could force the Fed into a more aggressive tightening scenario, reversing the current market expectations for lower rates. Employment data and inflation reports leading up to December could catalyze significant shifts in policy outlook if unexpected results emerge.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 6.30 in the morning London time on Thursday the 30th of October. The US Federal Reserve has been fangirling the Bank of England.
Not only was there one dissent in favour of a large cut, predictably from US President Trump's recent gubernatorial appointment, Miran, excitingly there was also a second dissent in favour of no change. This sort of three-way vote is very rare at the Fed, where dissent has typically been a carefully choreographed piece of theatre. It is far more reminiscent of the rarefied atmosphere of the Bank of England's Monetary Policy Committee, where dissent is seen as an academic badge of honour.
Paul cast some doubt on the idea of a December rate cut, with the absence of a properly functioning US government hampering the ability to understand what is going on in the economy in real time. The rise in inflation is clearly bothering some at the Fed, and although the brittle state of the US labour market seemingly held sway and encouraged what could be considered an insurance rate cut, the lack of data and genuine worries about inflation persistence might possibly prevent a December move. The Fed also announced that the so-called Quantitative Tightening Policy, whereby liquidity is drained from the system, is to come to an end in December.
This should not necessarily be characterised as an accommodative move. The point about Quantitative Policy recently has been a desire to balance liquidity supply and liquidity demand in the US economy. Liquidity demand has fallen after the pandemic-induced surge, and so it was right that liquidity supply should decline over the course of the recent past.
The Fed's comments suggest that they now believe the supply and demand for liquidity are in balance, more or less, and therefore by ending Quantitative Tightening they are maintaining a neutral liquidity position. We get the European Central Bank policy decision today, but this is likely to come with far fewer flourishes than the Fed. Markets are not expecting any change.
With one voice, almost 60 economists surveyed have declared that rates will stay as they are. The idea that so many economists could be out of sync with reality is of course unthinkable. We do get preliminary October German consumer price inflation figures, which are expected to slow a little in year-on-year terms.
Again, this is not seen as a policy driver at the moment, but unlike the United States, the relatively negative trend of US inflation rates is a general support for consumer spending in the euro area. Meanwhile in Asia, China's President Xi and US President Trump appear to have agreed a one-year trade deal. The US has announced this, but China has yet made no reference.
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