UBS On-Air: Paul Donovan Daily Audio 'Fed Day'
As discussed in the UBS commentary, a unanimous consensus among economists forecasts no change in US interest rates, with 92 out of 92 predictors signaling stability for the Federal Reserve's upcoming decision. This sentiment aligns with observed consumer behaviors, where spending remains resilient despite concerns over potential unemployment risks. The desk interprets this as a clear indication of the Fed maintaining its current policy stance while leaving room for an insurance rate cut if inflation trends higher in the future. Notably, the commentary suggests that any potential policy developments might take a backseat to discussions around the Federal Reserve's independence amid ongoing legal challenges. Per the full note source, it's evident that this balanced approach is pivotal for sustaining economic growth amid trade-related pressures.
What the desk is arguing
The desk frames this as a clear indication that the Federal Reserve's monetary policy will remain unchanged for the time being. With a unanimous agreement among economists, the likelihood of a rate adjustment appears minimal, underscoring the Fed's cautious approach to a complex economic landscape.
Supporting this view, economic indicators show that consumer spending has held up well, countering fears about rising unemployment. The resilience in spending, coupled with the necessity to manage inflation expectations, suggests that any rate adjustments would be strategic rather than reactionary.
Where it sits in our coverage
The consensus target for USD positioning is set at 1.075, with major firms offering varying projections: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
The desk's expectation aligns closely with jpmorgan but diverges from bofa's more bearish outlook. This positioning reflects a stable interim for USD dynamics as traders interpret the Fed's steady rate policy.
How other firms see it
Firms such as jpmorgan and citi share an aligned view that anticipates stability in the dollar, particularly in light of current consumer spending trends, while bofa presents a more cautious stance, predicting potential depreciation based on upcoming economic pressures.
This outlook intersects with broader discussions surrounding U.S. inflation rates and trade policy impacts, particularly in the context of tariffs and their effects on consumer behavior. Key pairs to watch include USD/CAD and USD/JPY, which may reflect the broader sentiment around dollar strength as the Fed’s policy unfolds.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 0192 economists unanimously expect no rate change from the Fed today.
- 02Consumer spending remains strong despite rising savings pressures.
- 03Future insurance rate cuts may occur if inflation trends upward.
- 04Fed independence discussion may eclipse policy dialogues at the press conference.
Market implications
Traders should keep an eye on the USD, particularly near support levels around 1.075. The discourse surrounding Fed independence during the press conference may influence market sentiment, potentially affecting USD positioning against major pairs.
Risks to this view
A significant risk to this outlook would be an unexpected change in the Fed's policy direction, driven by a sudden spike in unemployment or inflation beyond forecasts. Legal challenges affecting Fed governance could also catalyze changes in perception and market behavior.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 28th of January. With unanimity, 92 out of 92 surveyed economists in the Bloomberg consensus expect the US Federal Reserve to leave interest rates unchanged today.
For one economist to be wrong in their views is, of course, hard to conceive. The idea that 92 economists could be wrong is simply beyond any conceivable sense of reason. The Fed will leave rates unchanged.
While there are concerns about the labour market, and it remains critical that fear of unemployment is still contained, consumer spending figures have held up so far. US consumers seem prepared to continue to reduce their savings rate in order to pay for the tariffs, and that has kept growth at a reasonable pace. An insurance rate cut may very well be needed in the future as inflation ticks a little higher.
Tariff effects still have a few months to work through, but there's no urgency around that rate reduction. The press conference is less likely to be about policy and more likely to focus on the independence of the Federal Reserve. The latest attempts to challenge the Fed's independence with court cases, etc., are bound to be a source of questioning.
A couple of issues here are of interest. One is whether Powell intends to remain as a governor after May. Their gubernatorial term doesn't expire until 2028.
Powell remaining a governor would constrain Trump's ability to sway interest rate decisions through the appointment process. Another question is what happens if the court case against Powell continues and the Senate, in consequence, refuses to confirm whoever Trump nominates as the next chair. In that situation, a vice chair would become acting chair of the Board of Governors.
The chair of the FOMC is a decision for the FOMC, however. Powell could conceivably still be FOMC chair beyond May. There is some inflation uncertainty in the state still.
If one were to take US President Trump's social media posts seriously, then new additional tariffs might add some further inflation pressures. The Fed is not likely to pay more attention to the President venting on social media than other government officials seem to. The potential ruling against the legality of tariffs also complicates the inflation outlook.
On inflation, however, Trump's comments appearing to support the recent slide in the dollar are less relevant. Currency moves, and indeed trade generally, tend to be far less significant for inflation than people suppose. Companies price to market.
No corporate chief exec is going to change a pricing strategy every time a foreign exchange dealer presses a button. Nearly all imports into the US have prices agreed contractually in dollar terms. This means that the currency pass-through to import prices is weak and slow in the US.
And of course the import price is typically only 40% of the final consumer price for a finished good, further blunting the currency effect. Where Trump's comments do have resonance is not with the trade side of the balance of payments, but with the capital flows side. If this builds the narrative of US relative decline, it adds to the idea of corroding reserve currency status.
It's not inflation, but the bond market that is most vulnerable to Trump's forays into the foreign exchange market. That's all for today. Have a good day.
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