UBS On-Air: Paul Donovan Daily Audio 'The Fed – mime versus meme'
The desk believes the Federal Reserve will maintain its current monetary policy stance amidst ongoing supply-driven inflation. Per the full note by UBS, markets are not anticipating any rate changes, while the communication style of Fed Chair Walsh may hinder clarity on future policy direction. As inflation perceptions remain high among consumers, the Fed's approach appears to be more performative than impactful, acting as 'mime rather than meme.' With no imminent policy shifts expected, participants should remain attentive to any hints from other Fed members that may provide insights on future actions.
What the desk is arguing
The desk posits that a stable monetary policy is likely from the Fed in the near term, reflecting market expectations of no immediate rate changes. This position is reinforced by UBS's perspective on the current phase of inflation being temporary and somewhat misunderstood by consumers.
Data from the Fed suggests rates have reached the upper limit of the neutral range, which limits their room for maneuver. The desk emphasizes that although inflation is a pressing concern, it represents a series of isolated shocks rather than persistent inflationary pressure over the long term, which could complicate Fed messaging.
Where it sits in our coverage
Our consensus target for the USD is 1.075 within a range of 1.04 to 1.12. Notable firms contributing to this consensus include: - jpmorgan – target: 1.10, Mar26 - bofa – target: 1.04, Mar26
This view present aligns closely with jpmorgan, indicating a slightly hawkish stance towards the upper range reflecting current market sentiment, while bofa sits at the lower bound in a more cautious position.
How other firms see it
Firms like jpmorgan and others appear to be aligned with this perspective, indicating a stable view on the Fed's approach, while bofa provides a contrasting outlook advocating for caution amid inflation concerns. As the inflation narrative escalates, currency pairs such as GBP/USD and EUR/USD are likely to respond directly to Fed communications and policymaking actions significantly influencing market sentiment.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01The Fed is not expected to change monetary policy in the near term.
- 02Chair Walsh's communication style may obscure clarity on future policies.
- 03Current inflation pressures are viewed as temporary and driven by supply shocks.
- 04Market participants should focus on insights from other Federal Reserve members.
Market implications
Watch for any comments from Fed members that might shift market expectations, particularly as inflation narratives evolve. The 1.075 level for the USD will be pivotal in gauging trader sentiment regarding the Fed's future stance.
Risks to this view
A sudden change in inflation dynamics or clearer-than-expected communications from the Fed could rapidly alter the current market outlook, especially if a more aggressive tightening path is indicated by the decision-makers.
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 28th October. Today we get a decision on US monetary policy.
Markets are not expecting any change today, though there is eager anticipation for what happens next. Unfortunately, such are the communication skills of Fed Chair Walsh, we are unlikely to get any clear indication from today's press conference. Insight will depend on the views of other members of the Federal Reserve, with several of the committee commanding considerable respect amongst investors.
The Fed's problem is that they are facing a supply shock driven inflation episode over which they have no control. It is a temporary inflation problem which will fade within a year of its starting, in other words before policy could hope to have a meaningful impact on prices in the wider economy. But because this is the fourth one-off shock in a row, to the layperson this looks like a continuous inflation episode.
It is not. A continuous inflation episode would mean that what rose in price last year rises in price this year and rises again in price next year. That is not what is happening right now.
It is possible that a better communicator than Walsh could have conveyed that, but to be fair it is very difficult. Consumers are not rational when it comes to inflation perceptions. Few ordinary US households understand what the Fed is or does, and in the face of an affordability crisis driven by inflation perceptions, they are unlikely to listen to logic.
The Fed's response seems to be to talk tough while raising rates to the top of the neutral range. Gesture rate rises, a form of performative art and, in the case of the Walsh Fed, a mime rather than a meme. That seems to signal we are doing something and allows the Fed to take credit when the inevitable inflation decline comes about.
However, staying within the neutral range means that the growth outlook should not be impacted. The inflation outlook is obviously unaffected. There are two risks.
First, that the Fed misjudges where neutral is, which given the quality of US labour force data has to be a consideration. And second, that the markets take the hawkishness as a sign that the Fed intends to counter an oil shock with a repressive policy and a recession in the non-oil economy, a scenario bond investors though not equity investors have been flirting with. The Wall Street Journal has reported that the United States is warning Gulf countries of a potential short, intense renewal of the Gulf War after the US mid-term elections.
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