UBS On-Air: Paul Donovan Daily Audio 'Three and one from the Fed'
The desk believes that Fed Chair Powell's upcoming remarks will be pivotal, particularly in light of the recent surge in oil prices and the potential for Powell to extend his tenure beyond May. It seems investors are keen to understand how the Fed will respond to rising inflation from energy costs, particularly noting that gasoline prices have increased by 35.5% from recent lows, which could influence profit-led inflation dynamics. Per the full note from UBS, Powell's communication might factor into future monetary policy directions significantly. This timing becomes critical as the market anticipates no major changes in policy at the Federal Reserve's next meeting due to the absence of pressing economic data releases in the near term, avoiding catalysts that could shift market focus away from Powell's guidance.
What the desk is arguing
The desk perceives Fed Chair Powell's comments as crucial amid shifting economic conditions, especially regarding inflation expectations driven by rising oil prices. Given that retail gasoline has risen sharply—by 35.5% from the lows this year—investors are eager for insights into how these costs could affect broader inflation trends and the Fed's policy stance. Per the full note from UBS, Powell's continuation as Chair could mitigate the sense of being a 'lame duck', making his remarks more consequential for future policy discussions.
Moreover, Powell's statements could provide direction on the underlying strength of the U.S. economy, which has caused division among policymakers. If oil prices stabilize, the Fed's focus may shift back to domestic economic indicators, reinforcing expectations around interest rates and inflation. Therefore, traders should closely monitor Powell's press conference for any potential shifts in guidance that could signal a change in interest rate trajectories.
Where it sits in our coverage
Our consensus target for the USD is set at 1.075, with a range between 1.04 and 1.12. The following firms provide insights into their forecasts for this period:
This view aligns moderately with the expectations set by jpmorgan, which also sees movement towards the upper bound of our range. However, it diverges from bofa, which holds a more cautious stance with a lower target, reflecting differing perspectives on the Fed's trajectory amid current inflationary pressures.
How other firms see it
Several firms, including jpmorgan and others, anticipate that Powell's comments may introduce upside risk for the dollar, particularly if inflation concerns prompt a hawkish shift in sentiment. Conversely, bofa maintains a more bearish view, suggesting that market players may not react as robustly to Powell's statements should inflation veer higher without corresponding action from the Fed.
Traders should also keep an eye on indicators such as the U.S. CPI and WTI crude oil dynamics, as these metrics will have significant overlap with Powell's discourse, influencing the USD's trajectory in the short term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fed Chair Powell's comments are expected to be influential due to rising oil prices and inflation concerns.
- 02Retail gasoline prices have increased by 35.5%, affecting consumer perceptions and potential inflation measures.
- 03There is division among policymakers on the U.S. economic outlook, which may guide future Fed policy decisions.
- 04Market focus will be heavily centered on Powell's press conference for clues on monetary policy direction.
Market implications
Expect volatility around Powell's press conference, particularly if inflation signals point to more aggressive Fed policy. A break beyond the 1.075 level may influence dollar-movement strategy, especially as market participants evaluate Powell's comments against the backdrop of rising oil prices.
Risks to this view
A significant reversal could occur if Powell downplays inflation concerns or indicates a more dovish approach than anticipated, particularly if oil prices stabilize without noticeable second-round effects. Any unexpected economic data leading up to the meeting could also shift sentiment considerably.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's seven o'clock in the morning London time on Wednesday the 18th of March. The US Federal Reserve meets and is likely to leave policy unchanged and to be divided in that decision.
The focus is therefore going to be on the Fed Chair's press conference. There are three reasons to focus on Fed Chair Powell's remarks and one reason to downplay them. First, it is plausible that Powell remains as Chair of the FOMC, though not the Board of Governors, beyond May.
The US administration is pursuing its legal challenge to the Fed, despite scathing court rulings, meaning that former Fed Governor Walsh's nomination is unlikely to be confirmed any time soon. Powell was elected as Chair of the FOMC for a 12-month period back in January, so presumably stays in that role as long as they're a Governor. An extension of Powell's reign extends the period over which Powell's comments are going to be considered important.
Markets are unlikely to be clamouring to hear what Walsh thinks at the moment. Investors will want to know about the Fed's reaction to the oil price shock. Retail gasoline prices have risen every single day for four weeks and are now almost exactly a dollar higher from this year's lows, a 35.5% increase.
US consumers are noticing that directly. Central banks are supposed to look through an energy price increase, but the Fed will watch for second-round effects, which in this case would probably come through profit-led inflation. Investors will also want to know about the Fed's views on underlying economic strength, something that has already divided US policymakers.
If US President Trump does find an exit strategy from the war in the Gulf within a few weeks and oil prices settle down within the next six months or so, then it is the underlying economics that will dictate the direction of Federal Reserve policy. So with all this drama, why downplay the remarks? Because on this occasion, it is the role of the Fed Chair to cheerlead.
US households are having to cut savings rates to pay for both tariffs and gasoline prices, and to do that they need to have confidence. While many US consumers will not necessarily know who Powell is or what the Fed does, it's important to prop up the confidence of those who are paying attention. US February producer price inflation data is due.
This is compiled by the Bureau for Labour Statistics and not the Bureau of Economic Analysis. The latter created some noise by silently shifting the source for some of their inflation numbers last week. This data has been a bit noisy recently, partly because companies seem to have been eager to pass on cost increases somewhat earlier in the conventional pricing cycle than is considered normal.
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