UBS On-Air: Paul Donovan Daily Audio 'Dissent and discontent'
The key takeaway from Paul Donovan's commentary is the increasing discord within the Federal Reserve regarding future interest rate policy, paralleling recent trends seen in the Bank of England. Per the full note source, Governor Miran's push for more aggressive rate cuts has been met with dissent among other Fed officials, indicating a fractious internal debate as some members advocate for maintaining rates due to inflation concerns. This backdrop points to a complex landscape for U.S. monetary policy, especially with the consensus indicating only one more rate cut anticipated in 2026, which brings forward the notion that the Fed may not deviate from neutral territory anytime soon. Currently, the U.S. economy would benefit from risk management as opposed to stimulating measures, reflecting persistent uncertainties tied to tariffs and inflation management strategies.
What the desk is arguing
The desk argues that the Federal Reserve's internal dissent signifies a cautious approach to monetary policy amid mixed economic signals. Donovan notes that Governor Miran's push for a significant rate reduction has failed to resonate with a majority of the committee, which points to possible instability under new leadership as the next Fed chair may struggle to align differing opinions.
Supporting evidence from the commentary includes Governor Miran's failed proposition for a half-point cut and the Fed's projection of only one remaining rate cut by 2026. This emphasizes a notable shift from aggressive easing to a strategic hold amid considerations of economic insurance against potential downturns.
Where it sits in our coverage
The prevailing market sentiment indicates a target for EUR/USD around 1.075, with a range from a low of 1.04 to a high of 1.12. Firm targets include: - JPMorgan: 1.10 for Mar26 - BofA: 1.04 for Mar26
The desk's viewpoint aligns with jpmorgan, which shares a similarly bullish perspective, while bofa diverges with a more cautious stance at the lower end of the forecast range.
How other firms see it
Firms like jpmorgan and goldman anticipate a stabilization of policies favoring continuity in rate settings, while bofa and citi take a more bearish outlook. Interestingly, the dynamics of USD/JPY will reflect these varied expectations as traders assess Fed actions. Moreover, the trajectory of EUR/USD will likely correlate with ongoing developments in the economic calendar.
What the calendar says
There are currently no high-impact events on the horizon that would directly influence this narrative. Traders should remain alert to shifts in sentiment from upcoming data releases, particularly related to inflation and tariffs, which may provide clearer guidance on the Fed's policy direction in the coming months.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Federal Reserve is experiencing significant internal dissent regarding rate policy, with Miran pushing for cuts.
- 02Current projections suggest only one more rate cut is anticipated by 2026, emphasizing a cautious monetary stance.
- 03Conditions are being monitored closely due to inflation pressures and tariff impacts on the economy.
- 04The Federal Reserve's approach reflects a need for risk management rather than stimulus at this juncture.
Market implications
Traders should focus on the 1.075 level as indicative of current market sentiments regarding future rate trajectories. Any shifts in projections or language from the Fed could lead to volatility in EUR/USD and USD/JPY, aligning closely with evolving economic data.
Risks to this view
A strong economic recovery signal or unexpectedly high inflation metrics could prompt a shift in the Fed's stance, potentially leading to earlier rate hikes than currently anticipated. This would significantly reverse current bullish bets based on rates potentially remaining stable.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 4.30 in the morning London time on Thursday 11th December. The US Federal Reserve once again enjoyed a variety of opinions on where interest rates should be going.
The pattern of dissent seems to be mimicking the style of the Bank of England, although of course this is with a US accent rather than a British accent and things are always a lot more convincing in a British accent. US President Trump's latest appointment as Fed Governor, Mirren, asked for a half-point cut. Mirren, presumably, has quite a pessimistic view of the United States, which must be getting more pessimistic as they repeatedly fail to get their way.
Two regional Fed presidents represented the more hawkish view that is concerned about the rising US cost of living, and so voted for unchanged rates. The result was a quarter-point rate cut backed by a majority of the committee, but as the level of dissent suggests, more uncertainty under the next Fed chair, especially if the next Fed chair struggles to command the respect of either the Federal Reserve or the financial markets. The future projections grabbed attention through the fabled dot plots, forecasting only one more rate cut in 2026.
Federal Reserve Chair Powell also said that the current level of interest rates is considered to be within the neutral range. Aside from those who have a very pessimistic view of the US economy, Fed members are unlikely to want to move outside of the neutral zone at the moment. The US economy needs insurance against downside risks, for sure.
It does not need stimulating at a time when tariffs will still work their way down supply chains, and the administration's attempts to slow inflation with selective tariff rate cuts have yet to be shown to work. The US publishes, very late of course, its trade data for September. This is still useful information, as the details can help identify how easily tariffs are being avoided by US importers through things like rerouting.
Rerouting is not costless, it is less efficient than selling directly without incurring tariffs, but it is a reason why the economic damage from the tariffs to both exporters and the United States has not been as severe as the worst-case scenario projections. South Korean export data for the first 10 days of December showed strength in exports, consistent with the overall general pattern of trade being fine away from the United States, but it is too short a sample period to be a major market focus. The seizure of an oil tanker off the coast of Venezuela by US forces might get the attention of the news cycle.
It has not so far had a significant impact on financial markets. Oil prices flickered a little higher as the news broke. Presumably the risks of defying sanctions and trading Venezuelan oil are perceived to have increased.
However, the shift in oil prices so far is not economically significant at all. That's all for today. Have a good day.
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