UBS On-Air: Paul Donovan Daily Audio 'Rates and spending'
The desk interprets the current state of U.S. monetary policy as poised for stability amid mixed signals regarding inflation and external pressures. Per the full note from UBS's Paul Donovan, while consensus leans toward unchanged interest rates today, President Trump's call for cuts adds a layer of complexity, reflecting his borrower-centric view. Underlying inflation remains modest, but ongoing geopolitical tensions and fiscal hesitations create uncertainties that the Fed must navigate carefully. Looking ahead, traders should remain vigilant for new data that could provoke rate adjustments, particularly regarding fiscal policy impacts and import taxes.
What the desk is arguing
The desk anticipates that the Federal Reserve will maintain current interest rates, noting President Trump's influence may not align with economic fundamentals. Per the full note from UBS, Trump's push for rate cuts is seen as driven by his personal borrowing experiences rather than a clear economic necessity.
The expectation of stable rates stems from current inflation measurements which show only modest pressure. Indicators, such as owner's equivalent rent, suggest that inflation won't present an immediate threat to Fed policy, even as fiscal policy remains in a flux, casting a shadow over growth outlooks.
The counterfactual is the consideration that stronger than expected inflation could prompt the Fed to act more aggressively. However, current data seems insufficient to justify such a pivot, keeping rates on hold for the foreseeable future.
Where it sits in our coverage
Our target for USD/EUR is set at 1.075, within a range of 1.04 to 1.12, in line with several institutional perspectives. Notably, jpmorgan aligns at a bullish target of 1.10 for March 2026, while bofa takes a more bearish stance with a target at 1.04 for the same tenor. This reinforces the positioning around a relatively stable USD outlook despite various external pressures.
The desk’s analysis supports a view that is somewhat aligned with the upper bounds of the consensus forecasts. As such, it underscores a steadier approach as market participants weigh Fed signals against evolving fiscal narratives.
How other firms see it
Most firms seem to align on a cautious outlook regarding U.S. interest rates, favoring an unchanged stance in the immediate term. bofa stands out with a contrary view, suggesting a more cautious approach toward USD positioning, likely anticipating significant shifts based on incoming economic data.
Watch the EUR/USD trajectory for insights that could reflect changes in Fed approach, particularly in light of forthcoming labor market data and inflation prints which would directly intersect with monetary policy direction.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed is expected to maintain current interest rates amid modest inflation pressures.
- 02Political influences, particularly from the Trump administration, may complicate Fed decision-making.
- 03Upcoming fiscal policy developments will be crucial in shaping rate expectations.
- 04Despite external pressures, economic fundamentals suggest stability for the USD.
Market implications
Traders should focus on 1.075 as a key level for USD/EUR, with market reactions likely influenced by upcoming economic indicators. A significant deviation in inflation metrics could trigger volatility in Fed expectations.
Risks to this view
A faster-than-expected rise in inflation could force the Fed's hand toward tightening, invalidating the current stable outlook. Additionally, shifts in fiscal policy or geopolitical developments could also catalyze rapid market adjustments.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday 29th January. The US Federal Reserve meets today to decide on interest rates.
The political backdrop to this decision is somewhat disrupted. The market expectation is for no change in rates. US President Trump has signalled that they would like significant rate cuts, but the Fed is unlikely to view this as economically warranted at the moment.
Trump's experience with interest rates has primarily been as a borrower, which may explain their tendency to favour lower rates. Looking forward, the Fed has a more complicated set of decisions to take. Underlying inflation pressures are modest.
Near-term inflation reductions are quite likely to come in part from things like owner's equivalent rent. As a fantasy price, owner's equivalent rent doesn't affect anyone's spending power. But with Fed Chair Powell effectively elevating its importance with their mantra of data dependency and their greater emphasis on headline CPI, it is relevant.
The Federal Reserve has to balance how the new administration's policies will affect the risks to growth, potentially to the downside, and to inflation, potentially to the upside. Comments on the effects of import taxes at the press conference are likely to be a key focus. The assumption is that the Federal Reserve will look through the direct inflation impact of any import tax, but that they will pay attention to any second-round effects that might magnify the inflationary impulse of tariffs.
Meanwhile, fiscal policy in the United States is causing some confusion. The administration imposed a temporary freeze on federal loan and grant payments, which constitute about a third of state government revenues. Over-opposition in certain areas seem to lead to either a retreat or a clarification for some aspects of these freezes.
A federal court blocked the relevant executive order. There are questions as to whether that block is being observed. The immediate economic effect of a freeze would be similar to a government shutdown, with which markets are depressingly familiar.
The two longer-term questions for investors are, first, whether rule of law is observed – investors are very keen on rule of law – and, second, if the executive branch of government does seize power to decide whether money should be spent, whether this might make passing compromised budget deals in Congress more difficult in the future. A member of Congress might be less willing to agree to a tax cut in exchange for support for a spending programme, say, if the implementation of the spending programme depends on the whim of the executive branch. From Europe, there is the German GfK consumer confidence data.
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