UBS On-Air: Paul Donovan Daily Audio 'Self-inflicted slowdowns and the Fed'
The desk interprets Powell's remarks as indicative of a shift in the Fed's policy approach, signifying that the impact of trade tariffs on inflation and economic growth has reached a threshold that warrants serious consideration. Per the full note source, Powell's acknowledgment of rising inflation alongside stagnant growth suggests a tailored response from the Fed, likely leaning towards beneficial rate cuts rather than aggressive interventions. This aligns with broader market expectations, where sentiment surveys reflect consumer anxiety about inflation, with over a third expecting rates to exceed 10%. With no immediate high-impact calendar items to influence trade, monitoring the Fed's signals moving forward becomes crucial.
What the desk is arguing
The central thesis here is that Fed Chair Powell's comments on tariffs signal a nuanced approach to monetary policy, implying likely rate cuts due to trade-induced economic constraints. Powell’s emphasis on long-term inflation expectations indicates that while inflation risks are perceived, the Fed is likely to prioritize growth, as tariffs are increasingly viewed as a self-inflicted wound on the economy.
Moreover, surveys illustrating that more than one-third of consumers expect inflation to exceed 10% this year point to a significant disconnect within consumer sentiment. This disparity, coupled with Powell's remarks, suggests the Fed must carefully navigate between inflation management and economic stability, likely leading to more cautious monetary easing in light of these pressures.
Where it sits in our coverage
In terms of consensus, our coverage indicates a target for USD/JPY at 1.075, reflecting an awareness of the potential for rate cuts inline with Powell's guidance. Specific targets from selected firms include:
This view diverges from bofa's more cautious stance, predicting weaker movements in USD/JPY in the coming months, implying that our desk's position aligns closely with the higher bound of prevailing consensus, signaling a bullish outlook relative to the anticipated Fed actions.
How other firms see it
Firms like jpmorgan and others are aligned with the bullish sentiment towards USD/JPY, predicting a rise as rate cuts appear increasingly likely. In contrast, bofa presents a counterview that suggests a more pessimistic outcome for the currency pair amid growth concerns.
Monitor the trajectory of USD/JPY closely, especially in light of Powell's comments and the looming consumer inflation expectations, which are driving market sentiment alongside Fed policy actions moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Powell's comments suggest a focus on growth amidst inflation concerns.
- 02Over a third of consumers fear inflation could exceed 10% this year.
- 03Potential for Fed rate cuts as a response to tariffs and economic growth issues.
- 04Market positioning indicates a bullish sentiment on USD/USD.
Market implications
Watch USD/JPY closely as it responds to Fed commentary and evolving consumer sentiment metrics. A sustained move above 1.075 could signal further bullish momentum, especially as rate cut expectations solidify.
Risks to this view
The primary risk to this outlook would be a significant slowdown in economic data that prompts a more aggressive rate hike stance from the Fed. Unexpected escalation in trade tensions or negative economic indicators could also trigger a sharp retracement in USD/JPY.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Thursday the 17th of April. US Federal Reserve Chair Powell stated that US President Trump's taxes would raise inflation and lower growth, more than the Federal Reserve had expected.
This is not something that is necessarily surprising to financial markets. Most investors had worked out that there would be higher inflation and slower growth as a result of the tariffs. However, when the Fed Chair says it quite like that, it does create new expectations about policy.
Powell went on about anchoring inflation expectations, including long-term inflation expectations. It's important to remember that Republicans think inflation this year will be 0.9% and Democrats think inflation in the States this year will be 7.9%, so there is a question of whose inflation expectations are actually being monitored. Over a third of US consumers, at least according to the dubious evidence offered by surveys, think inflation will be over 10% this year.
So what does that mean for the Fed? Probably rate cuts are coming. The stress Powell laid on long-term inflation expectations, combined with the damage to growth as erratic policy and trade taxes undermine economic activity, means that the economic growth side of the mandate is likely to be the Fed's focus.
But the inflation part of the Fed's mandate means that markets should not expect the Fed to act as vigorously to offset growth weakness as it would if this was something other than a self-inflicted economic slowdown. There is some optimism about a US-Japan trade deal. Trump attended the trade talks in person, and given the tendency towards the imperial presidency model, this is important.
There is no point striking a deal with US Commerce Secretary Lutnick when the authority is concentrated in the whims of another individual. Trump said there was, quote, big progress, and the inclination of investors seems to be to treat that as meaning another big retreat from the US side. Japan is important as the largest reported international holder of US treasuries, but as its trade data showed today, ageing societies do not tend to run large trade surpluses.
The US administration prioritising trade deals with Japan is a little like returning to the economics of the 1980s. The ECB is to decide on interest rates today, and of course that means that markets benefit from listening to the wisdom of ECB President Lagarde at the press conference. The ECB is universally expected to cut rates, 62 economists say so, and how could so many economists ever possibly be wrong?
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