UBS On-Air: Paul Donovan Daily Audio 'Say more'
The desk interprets the recent hawkish tone from the Federal Reserve, as outlined by Paul Donovan from UBS, as a significant shift in the central bank's commitment to combating inflation. This firm stance may create friction between Fed Chair Warsh and the Trump administration, particularly as the Fed's own research indicates that tariffs have contributed to rising inflation in the U.S. The establishment of new committees at the Fed raises questions about the agility of future policy changes, suggesting that the hawkish rhetoric may not translate into immediate actions. Ongoing scrutiny of U.S. unemployment, detailed in the Fed's truncated communication, highlights the complexities in navigating current economic conditions. Per the full note source, this development emphasizes the importance of understanding the nuanced implications of Fed policy amidst structural changes in the economy, which have not been seen in the last 250 years.
What the desk is arguing
The Federal Reserve's recent meeting has conveyed a notably hawkish message, particularly concerning the fight against inflation. The desk believes this reinforces a broader narrative of potentially constrained monetary policy. Per the full note source, Donovan highlights the internal divisions within the Fed, which are increasingly leaning towards a more hawkish stance.
Supporting this viewpoint is the Fed's acknowledgment that tariffs, a central policy of the Trump administration, have notably affected inflation dynamics. Donovan notes that while the impact of future tariffs may diminish, the repercussions of previous ones remain significantly embedded in the economic fabric. The absence of any immediate policy agility following the establishment of multiple Fed committees signals an emphasis on deliberation over decisive action.
Where it sits in our coverage
Our current consensus target for the USD/EUR stands at 1.075, with a range extending from 1.04 to 1.12. Specific firm expectations include that of jpmorgan, targeting 1.10 by March 2026, contrasting with bofa's lower ambition of 1.04 within the same tenor.
This hawkish tone from the Fed aligns with the views articulated by jpmorgan, but diverges from the more dovish stance observed at bofa. The desk's positioning could be seen as favoring the upper range of the consensus, given the outlook on inflation.
How other firms see it
Firms aligned with a hawkish view include jpmorgan, which supports the idea of sustained inflation concern leading to tighter policies. In contrast, our contrary firms like bofa maintain a more cautious outlook on the Fed's trajectory.
The implications for currency will be significant, with the USD/EUR currency pair likely reacting to shifts in Fed communication—such as inflation reports and unemployment data—particularly as they pertain to the Fed's policy posture.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed's hawkish tone indicates a stronger focus on combatting inflation.
- 02Disputes may arise between Fed leadership and the Trump administration regarding tariffs.
- 03Limited agility in policy setting suggests that immediate changes are unlikely.
- 04The complexities of the U.S. economic situation require nuanced communication from the Fed.
Market implications
Traders should monitor the USD/EUR exchange rate closely as inflation reports surface, considering the Fed's potential tightening could push this pair towards higher ranges. The current level of 1.075 sets a watchpoint for potential shifts in sentiment or policy decisions.
Risks to this view
A significant shift could come from unexpected dovish signals from the Fed, especially if macroeconomic indicators such as inflation or employment metrics deviate sharply from forecasts. Additionally, any major policy changes from the Trump administration concerning tariffs could distort these dynamics.
Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 18th of June. The tone of the US Federal Reserve meeting and subsequent press conference erred to the hawkish.
This had been expected. The divisions within the Fed were tilting that way on balance, but the focus on fighting inflation was notably strong. This could well set Fed Chair Walsh at odds with US President Trump, whose policies have resulted in higher prices, according to the Federal Reserve's own research.
Admittedly, the next round of tariffs may not have such a big impact on US inflation as did the last round, in part because the collapse of the last round of tariffs did not lead to any correcting disinflation impulse. The establishment of multiple committees at the Federal Reserve does not suggest that there will be a great deal of agility in policy setting in the near term. Nothing kicks the can down the road like establishing a committee.
The hawkish tone is part of the normal economic cycle. What is perhaps more troubling are the communication signals. The Fed's dot plots still exist, which is unfortunate as these are a very unhelpful economic signal, creating a false sense of precision for the media to sensationalise.
The Fed's statement, where nuance could always be expected, was cut to about 130 words. That is 62% of the bullet point summary that accompanies this morning's audio comment. If it takes me 60% more words to communicate the day's news succinctly, one might question whether the new Fed statement is the right length to communicate all the subtleties of the increasingly complex economic outlook of the United States in the midst of the biggest structural changes the world has experienced in 250 years.
Walsh was so apparently amazed to discover that unemployment has changed little that a notable part of the terse statement was dedicated to that fact. The fact that unemployment has not changed very much is not news to the financial markets, businesses, or indeed any high schooler studying economics. It might not be helpful if future statements just state obvious facts, however surprised by those facts Walsh personally may be.
The Bank of England is likely to offer an unchanged interest rate today, but will probably have a divided decision. What the Bank is also likely to offer, not least from Governor Bailey, is an intelligent discussion about what is motivating the Bank at the moment and how the policy path is likely to develop. Inflation pressures have been more subdued than had been expected in the UK, although today's labour market data show little sign of weakness in employment.
Private sector wage growth is not signalling any particular cost pressures building, though demand from the consumer may get some additional support from sources of income that fall outside the scope of the labour market data. And public sector pay has also been growing more strongly than the private sector. Trump signed the Memorandum of Understanding with Iran at the Palace of Versailles last night which has some historical echoes.
As with the Treaty of Versailles, some form of reparations are seemingly to be given to one side of the conflict. The issues now are how quickly the Strait of Hormuz reopens, how the reconstruction and rearmament of the wider Gulf region is to be financed, and where the money is to be spent. While oil is likely to be as dollar-denominated as it has been in the past, it seems less likely that petrodollar revenues will default to being spent in the US in the way that they were in the past.
That's all for today. Have a good day. I am a subsidiary of UBSAG and a member of FINRA SIPC.
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