UBS On-Air: Paul Donovan Daily Audio 'Fed fun'
Lead — The desk believes the Federal Reserve will maintain its current interest rates, reflecting the broader trend of central banks balancing accommodative and restrictive policies. Per the full note from UBS, there is an anticipation of stability in US rates, contrasting with the shifts seen by the European Central Bank and the Bank of Japan. While the Fed has somewhat restricted its policy previously, an unchanged stance indicates its cautious approach amidst uncertain economic data. This backdrop supports our view of the USD's stability in the near term.
What the desk is arguing
The desk thinks the Federal Reserve will opt for a hold on rates, amid signs of conflicting policy directions from other major central banks. Per the commentary, UBS highlights the Fed's less aggressive positioning as fitting for the current economic climate. Importantly, the grip of dissenting opinions within the Fed, likened to recent trends at the Bank of England, complicates the outlook but underscores the Fed's precarious balancing act.
Given ongoing concerns about US economic data quality, the Fed's hold reflects strategic caution and a potential desire to maintain control over market perceptions, particularly under new leadership. The counterpoint to this maintained position could arise if deteriorating economic signals prompt unanticipated adjustments as early as the next meeting.
Where it sits in our coverage
Our consensus target for the USD remains 1.075, with forecasts from several key firms: - jpmorgan: 1.10 for Mar-26 - bofa: 1.04 for Mar-26
This desk's projection aligns with jpmorgan, suggesting a stable USD scenario amid Fed indecision could support appreciation. However, the range indicates notable differing views, especially with bofa targeting a considerably lower outcome.
How other firms see it
jpmorgan and deutsche share a similar outlook on a stable USD, while bofa diverges, indicating potential pressure on valuations in the event of a hawkish surprise by the Fed. Concurrently, the discussions around USD/JPY and EUR/USD are pivotal, as movements in these pairs will likely highlight reactions to central bank policies and inflation data.
What the calendar says
With no immediate high-impact events scheduled over the next 30 days, traders should remain vigilant ahead of future US unemployment and inflation data which could weigh on the Fed's next steps. The interplay between these economic indicators and policy stances will be crucial in shaping market sentiment moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed likely to maintain rates amid economic uncertainty.
- 02Other central banks show diverging policy paths.
- 03Dissent within the Fed poses risks to policy consistency.
- 04Watch for implications on USD stability and its implications socially.
Market implications
Traders should monitor the USD around the 1.075 mark, as this is pivotal for assessing potential directional bias. Any major shifts in employment figures or CPI data may also prompt a reevaluation of risk positions surrounding US debt instruments.
Risks to this view
A significant deviation in upcoming economic data or unexpected shifts in Fed communication could validate opposing views and lead to a rapid recalibration of interest rate expectations, potentially undermining the current stance.
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 17th of June. The US Federal Reserve policy decision today should leave interest rates unchanged.
In the past week or so, we've had the Bank of Japan move from accommodative towards neutral in an appropriate manner. We've had the European Central Bank move from neutral towards restrictive in a policy error. For the Fed, which began the year with a mildly restrictive policy position, an unchanged stance seems the most likely outcome for now.
What is perhaps of more interest will be signals around the authority of Fed Chair Walsh. States have, for many years, fixated on the Fed Chair as setting the tone for policy, both in a cyclical sense and in a philosophical sense. The policy framework of Yellen, with a labour market focus, or Bernanke, very focused on liquidity, helped to shape expectations about the broad trends and direction of policy.
With Powell, the philosophy of policy was notable by its absence, and that was a problem. With Walsh, the question is whether a coherent policy will be presented and, more significantly, whether Walsh will be able to rally support for whatever cyclical views they may hold. Walsh's reputation in the Fed is such that the new chair may not receive the deference previous chairs, including Powell, have received.
The dissent within the Fed over policy has almost become Bank of England-like in recent quarters, partly because some members may be guided by politics more than economic data, partly because the deteriorating quality of economic data in the United States means that one can spin the numbers to fit any personal policy bias. UK May consumer price inflation came in lower than expected, and the consensus forecast range was actually skewed to the upside. Inevitably, given the oil price, transportation costs were the main upside contribution.
Most other sectors were pulling down the inflation rate. The full impact of energy prices will come later in the year, with the weirdness that is the UK's electricity pricing structure hitting prices later on. But for now, this is a pretty benign set of figures, and it is unlikely to spur any kind of action on the part of the Bank of England.
The United States is offering May retail sales data. The narrative here is well-established. Consumer spending on retail sales and on services is growing faster than income, because the inflation caused by the war in the Gulf and the dwindling inflation impulse that comes from tariffs have generally been paid for by lowering savings rates, rather than by cutting back on spending.
The US consumer's determination to spend income they do not have on things they do not need is impressive, and there is no reason to suppose this is going to change in the near term. It all keeps the US economy operating at a reasonable pace of growth, although inevitably there is more fragility about the consumer's support today than was the course before the war. That's all for today.
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