UBS On-Air: Paul Donovan Daily Audio 'One Federal Reserve, many voices?'
The desk views the Federal Reserve's approaching policy evolution as a pivotal moment that could signal a wider acceptance of rate cuts despite ongoing inflationary pressures. Per the full note source, Fed Chair Powell's confidence to proceed without waiting for additional labor data suggests a deliberate approach to monetary policy that may set the stage for future cuts. As the Fed navigates rising inflation challenges, its upcoming decisions may reflect a complex balancing act between stimulating growth and managing price stability. The divergence within the Fed could present complications for Powell's successor while the broader market anticipates potential rate shifts. This groundwork is crucial as traders position in anticipation of Fed actions up to early 2026.
What the desk is arguing
The desk frames this as an important juncture for Fed policy as divisions within the Federal Reserve begin to surface. Powell's willingness to move forward with rate changes despite labor data uncertainty indicates not only confidence but perhaps also a strategic framing of the Fed's challenges. The potential for a rate cut in early 2026 aligns with market expectations but raises concerns about the broader implications for inflation.
The desk notes that one in five economists currently expect unchanged rates, with slightly more market participants leaning towards a rate cut. The internal dissent within the Fed could lead to more volatility in policy decisions moving forward, especially if inflationary trends do not stabilize, complicating the expected path toward easing in 2026.
Where it sits in our coverage
Currently, our consensus target for the USD against a basket of currencies is 1.075, placing us squarely in line with expectations from jpmorgan at 1.10 and diverging from bofa, which forecasts a lower target at 1.04 for March 2026. This positioning indicates we are slightly above the midpoint of the range when accounting for inflation risks and economic conditions.
How other firms see it
bofa and jpmorgan both have distinct views on the USD's trajectory, with bofa expecting a more substantial drop amid economic uncertainties, while jpmorgan maintains a bullish position, reflecting the expected rate cut dynamics. The consequent implications for USD/EUR and USD/JPY pairs will reflect the broader trends anticipated on US monetary policy adjustments as inflation plays a role moving forward.
What the calendar says
Given there are no high-impact events on the immediate horizon for the Fed or US data releases, traders should remain attentive to potential shifts in market sentiment surrounding inflation reports and upcoming Fed communications as they could drastically modify expectations and positioning.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Expectations for a December 2025 rate cut are solidifying.
- 02Fed dissent could complicate future decisions under new leadership.
- 03Inflation remains a critical concern as projections suggest it may increase.
- 04Market positioning may need recalibration based on evolving Fed narratives.
Market implications
Traders should watch the 1.075 level closely as it marks a crucial threshold for potential rate cut-led movements. The confidence exhibited by Fed Powell might provide signals leading up to the next policy meeting.
Risks to this view
A sudden turnaround in US labor market data could invalidate the call for rate cuts, especially if inflation continues to rise unexpectedly. Additionally, aggressive monetary tightening from other major central banks could impact the Fed's decision-making process, forcing a reassessment of the Fed's trajectory.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 3.30 in the morning London time on Wednesday the 10th of December. The US Federal Reserve's December 2025 meeting and its Associated Press conference from Fed Chair Powell is finally with us.
There is a small degree of uncertainty in financial markets, with about one in five economists looking for unchanged rates, but investors are now pretty much looking for a rate cut. If one wants to engage in conspiracy theories, one might suggest that the fact the Fed did not delay the meeting until after the missing employment data was released is a signal that the Fed Chair is sufficiently confident in the outcome as to be happy to move without much new information. On the other hand, the quality of US labour market data has deteriorated so much in recent years that maybe the Fed is just not interested in the random numbers that are typically generated every month.
It seems likely the Fed will go for a further rate cut in the early part of 2026. What is perhaps more interesting today is the extent of division within the Federal Reserve. This is potentially storing up trouble for Fed Chair Powell's successor as Fed Chair.
A Fed that is prepared to dissent under Powell may be more inclined to dissent under a Fed Chair who commands less respect in the institution and the wider financial markets. So what do the hypothetical rate cuts actually achieve in the US economy? They're probably not meant to be stimulatory.
It would be strange to stimulate as US inflation creeps higher and, as most projections suggest, it has higher to go before it peaks. However, there is little that the Fed can do to directly change the inflation consequences of either supply shocks or trade tariffs. It could offset them by causing deflation in other areas of the US economy, but that might be considered an excessively high amount of economic damage to levy.
Ignoring the inflation it cannot help without stimulating inflation in areas it can influence seems the most sensible course of action. But if not inflation, then the Fed's move must be focused on the labour market side of its mandate. This is probably an insurance policy against a shattering of the US labour market.
So much of the US growth outlook depends on keeping the fear of unemployment suitably low. Cutting rates may help to keep a few more people from losing their jobs, not stimulating growth by creating new enterprises or expanding credit, but preventing an abrupt increase in job losses that would rapidly turn into a loss of consumer spending. The downside risk is probably too abrupt for the Fed to stop if it were to be set in motion so it's best to try and head it off with an insurance rate cut or two.
China's consumer and producer price inflation data from November were basically as expected, with a fraction more deflation in the producer price numbers. Consumer price inflation accelerated but this was due to food prices. Food prices matter, particularly for an economy at China's state of development, but also because food is a high-frequency purchase.
However, food prices are often supply-side driven, especially in China. In this case, a sharp increase in food and vegetable prices pushed inflation higher. Higher food prices are not, therefore, reflecting a shift in economy-wide supply and demand patterns that would constitute genuine inflation.
It would be fair to characterise China as still being in a low-inflation, possibly disinflationary environment, and that is why the Politburo has been focused so much on attempting to shore up domestic demand. That's all for today. Have a good day.
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