UBS On-Air: Paul Donovan Daily Audio 'The Fed will cut, stay unchanged, or raise rates'

Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management, at 7 o'clock in the morning London time on Thursday 19th February. The US Federal Reserve minutes had a full range of views on display. There were members looking for rate cuts, members looking for unchanged rates for some time, and members looking for balanced views with hints at the possibility of rate hikes.

Indeed, the range of competing views was so broad that were it not for the complete inability of the minutes to spell out the word labour correctly, one could be forgiven for thinking that these were the minutes of a Bank of England meeting. The tone, suffice to say, was more hawkish than markets had perhaps anticipated. The idea of mentioning rate increases at all was not really looked for by investors.

Two-year Treasury bond yields moved higher, though not alarmingly so. All the comments were hedged about with appropriate economic justifications – hikes if inflation persisted, cuts if inflation fell and so forth. More in line with expectations was the idea of the views of a vast majority of the Fed that the labour market was more stable now.

This is of course very important to the economic outlook and the fact that US companies are perhaps learning to adapt to the erratic policy environment means that they may become more willing to hire in the future. Overall, the minutes didn't rule out lower rates, but they perhaps make rate cuts less likely in the very near term. Of course, the market does suppose that the Fed's policy decisions will remain politically independent.

Yesterday, one of US President Trump's economic advisers, Hassett, attacked the authors of a New York Fed paper and called for them to be disciplined for their work. The paper was not especially controversial and the views expressed in it are broadly those of an overwhelming majority of academic and financial market economists, not to mention the US public. Therefore, there is some nervousness that such an unusual intervention may signal another attack on the independence of the Fed.

That might be too strong an interpretation. It could just be that Hassett misspoke in the heated excitement of being interviewed on Fox News. There is little of economic note from Europe.

Economists have never paid attention to the release of the ECB's Economic Bulletin, for instance, and with the European economy in a rather dull state of doing fine, there is not much reason to get animated there. Instead, there is the entertainment of politics in full force. As with rather indecent haste, governments start jostling one another over who might replace ECB President Lagarde.

In an ideal world, the job would be given to an economist based on merit. That is not going to happen here. There is a hodgepodge of US data due.

None of it is really first tier, at least as far as markets are concerned, but it will all inform the economic narrative. The December trade data has political importance, but it is a bit more complex from an economic point of view. Tariffs have distorted normal seasonal adjustment trading patterns over the course of the last year, and the distorted trading pattern might indeed feed back to create future distortions for the seasonal adjustment process.

Wholesale and retail inventories are also tied up in these trade distortions, at least to some extent, as US companies built up and then utilised stockpiles to try and avoid paying the tariffs. There are also four Fed speakers on the agenda, and in the context of the Fed Minutes, those remarks may get more attention than is normal. That's all for today.

Have a good day. US Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research.

This material is for your information only and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, strategies, financial situation and needs of any specific recipient. This material may not be reproduced or copies circulated without prior authority of UBS.

Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.