UBS On-Air: Paul Donovan Daily Audio 'Mundanity upon mundanity'
The desk interprets the recent US monetary policy stance as indicative of a cautious approach in a turbulent economic landscape, with less flexibility in policy meetings moving forward. Per the full note from UBS, Federal Reserve Chair Warsh's suggestion to reduce policy meetings in 2027 amidst current volatility adds a layer of uncertainty for market participants. The absence of significant changes in monetary policy, as evidenced by no shifts in rates and continuing discussions around price metrics, suggests that the Fed is not positioned for immediate tightening, allowing traders to recalibrate their expectations. This equilibrium phase is crucial as the next inflation metrics, including the PCE deflator expected soon, may shed light on the persistence of inflation pressures in the economy.
What the desk is arguing
The desk frames this as a period of heightened scrutiny for US monetary policy, especially given the Federal Reserve's decision to maintain current rates and Chair Warsh's inclination for fewer policy meetings. This approach might constrain the Fed's capacity to respond swiftly to either inflationary pressures or economic downturns in the coming years.
Supporting evidence includes the overall tone of the Fed's recent communication, which, despite dissenting voices, indicated no immediate need for policy tightening. The upcoming personal consumer expenditures (PCE) deflator release is likely to reflect the impact of diminishing tariffs on inflation metrics, presenting a clearer picture of price pressures moving forward.
An alternative read would suggest that the Fed could maintain greater flexibility through additional rate hikes, but this scenario is less likely given the current economic context outlined by Warsh.
Where it sits in our coverage
Our consensus target for the USD index sits at 1.075 with a range between 1.04 and 1.12. Firms such as jpmorgan have set their target at 1.10, while bofa is more pessimistic, targeting 1.04.
This view aligns with jpmorgan, while sitting at the midpoint of our tracked targets. The desk's moderate stance reflects ongoing concerns over inflation due to energy prices and supply chain dynamics, acknowledged in this cautious monetary policy outlook.
How other firms see it
Consensus among firms like jpmorgan and barclays remains largely aligned, projecting a stable USD amid heightened uncertainty. Conversely, bofa holds a more bearish perspective, suggesting a corrective pullback in the near term.
Watch the core inflation data, particularly the PCE deflator, as it may directly influence currency pairs such as EUR/USD and USD/JPY, reflecting broader market movements influenced by Fed policy decisions.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed maintains current rates, signaling a cautious approach amid economic volatility.
- 02Chair Warsh advocates for fewer policy meetings, reducing future monetary flexibility.
- 03Upcoming PCE deflator data may clarify inflation persistence concerns.
- 04Market participants should reassess positioning given the Fed's stance.
Market implications
Traders should closely monitor the forthcoming PCE deflator release, which could shift sentiment in the USD and influence positioning strategies. Maintaining a watchful eye on energy price impacts is crucial, particularly with diesel costs potentially affecting core inflation measures.
Risks to this view
A significant spike in inflation metrics that surpasses market expectations could prompt the Fed to reconsider its current stance, leading to a rapid recalibration of policy and resulting market reactions. Similarly, unexpected geopolitical events could disrupt projections and currency stability.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Thursday 29th October. There were no surprises from yesterday's US monetary policy decision.
No change in rates, with two dissenting voices to that view, and nothing in the tone of the statement to suggest that policy tightening is going to fail to be an option in the future. The press conference of Fed Chair Walsh signalled fewer policy meetings next year, because in a fast-changing world having less policy flexibility is apparently a great idea. Walsh also reiterated a belief in the productivity pixie, which is potentially troubling for those who hope policy will be conducted sensibly over the longer term.
But essentially, this was a non-event of a meeting, and investors can move on with their lives. Walsh famously came up with a new measure of price pressures based on the number of items rising in price, without ever actually giving information about the specifics of how this metric was being calculated. Nonetheless, it was a metric that was bound to improve as tariffs start to fade from the US inflation calculation.
That should be in evidence today with the personal consumer expenditure deflator release. Energy inflation will be pushing up the headline numbers, although it's worth remembering that diesel prices are not a direct part of this calculation. Diesel will only appear as a cost pass-through into other prices, although that will include prices that form part of the core inflation calculation.
Nonetheless, fewer prices should be rising as the tariffs fade, and that underscores the narrowing nature of the current inflation shock. This is not likely to matter very much, or indeed at all, to inflation perceptions, but it should matter when economists come to consider the likely inflation persistence. The third quarter US GDP print is perhaps less exciting, simply because it will be revised beyond recognition in the coming months.
The resilience of the US consumer is still likely to be in evidence. Signs of that resilience fraying have been very slight so far, though it is perhaps not quite as dependable as it once was. The shiny new toy of artificial intelligence should also have added something to the growth.
The technology for this is a form of growth for other countries as it imports into the United States, but the physical construction is a domestic benefit. The imports should remain strong, and that continues to be a suitable drag on US growth. In all of this, the ECB's rate decision fades almost into obscurity.
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