UBS On-Air: Paul Donovan Daily Audio 'US rates – who decides?'
The desk posits that any moves by President Trump to undermine the Federal Reserve's independence could significantly impact the dollar's status as the world's reserve currency. Per the full note by UBS, recent actions taken against Federal Trade Commission commissioners raise concerns about the potential precedent affecting the Fed. Notably, Trump's past ability to influence central bank appointments underscores market anxieties, particularly regarding today's Fed meeting, which is expected to maintain the current interest rate setting amid prevalent uncertainty in economic policies.
What the desk is arguing
The desk asserts that President Trump's attempts to dismiss Federal Trade Commission commissioners could set a concerning precedent that threatens the Federal Reserve's cherished independence. Such a scenario would have grave implications for the credibility of US monetary policy and potentially destabilize the dollar's position as the primary global reserve currency.
Data reporting on international treasury flows due later today, while not exhaustive, will provide insights potentially reflecting market responses to these geopolitical developments. Markets have historically reacted sensitively to perceived threats against the Fed's autonomy, and any favorable legal outcomes for Trump could further complicate this dynamic.
Where it sits in our coverage
Our consensus target for the USD remains at 1.075, with a range between 1.04 and 1.12. Notable firms include: - JPMorgan: 1.10 by Dec-26 - BofA: 1.04 by Dec-26
The desk’s call leans toward the upper boundary of this spread, signaling a belief in potential downward pressure on the dollar amid heightened political uncertainty regarding the Fed.
How other firms see it
Firms such as JPMorgan align with the view that maintaining Fed independence is crucial, while BofA expresses a more cautious outlook, suggesting potential weakness in the dollar if political tensions escalate.
Focus on USD/JPY for spillover effects, particularly as global investors ponder how US policy developments may be reflected in currency stability amidst heightened indecision from policymakers.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Threats to the Federal Reserve's independence could undermine the dollar's reserve currency status.
- 02Current policy decisions at the Fed remain crucial amid a complex political landscape.
- 03Investors should closely monitor treasury flow reports as a sentiment gauge in light of recent political maneuvers.
- 04Today's Fed meeting is likely to leave interest rates unchanged despite ongoing economic uncertainties.
Market implications
Traders should watch for any significant shifts in USD/JPY as it may reflect broader sentiment on US policy risks. Today's treasury flow data will be critical in gauging international confidence in US debt, potentially influencing the dollar's trajectory in response to Fed announcements.
Risks to this view
Should legal maneuvers succeed in compromising the Fed's independence, it would likely lead to a loss of confidence in US monetary policy. Additionally, any sudden changes in economic indicators or geopolitical stability could substantially alter market perceptions and reactions.
Good morning. This is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Wednesday the 19th of March.
Yesterday, US President Trump appeared to fire the two Democrat commissioners on the Federal Trade Commission, which enforces consumer protection and tackles monopoly power. The commissioners are taking this action before the courts. The direct market impact of this is fairly slight.
The more significant concern is if this becomes a procedure that challenges the political independence of the US Federal Reserve. The legal precedent that protected the Federal Trade Commission commissioners might also be said to defend the independence of the Fed Chair and other members of the Board of Governors. When Fed Governor Barr resigned as Vice Chair but remained as a Governor, that constrained Trump's choices as to who would be appointed to replace them and reinforce the independence of the Federal Reserve.
If Trump were able to dismiss Barr as a Governor, then the President's ability to appoint whoever they liked would be checked only by the Senate confirmation process. And markets might not rely on the Senate to confirm independent minded policy makers. It goes without saying that a challenge to Fed independence would be a significant challenge to the dollar's reserve status.
The tick data on international flows into treasuries will be reported later today. This does not actually report all international flows into treasuries because the data doesn't dig very deep into where the money comes from. But it is a rough approximation and relevant to reserve status.
The Federal Reserve is, of course, independent for now. Today's policy decision is expected to leave interest rates unchanged. There are also forecasts which will be analysed aggressively by investors and media alike.
The problem with the forecasts is the considerable uncertainty that stems from the erratic policy climate in which the United States economy currently sits. On tariffs alone, there is uncertainty around how broad and how severe any tax increases will be, whether there will be a retreat from the tax increases, whether U.S. companies will raise prices if foreign imports are taxed, whether U.S. retailers will raise margin in another profit-led inflation episode, whether consumers will notice the tax increase and change their spending patterns in response, and whether other countries will retaliate in a way that would create additional problems for the U.S. economy. And that's before considering the uncertainties around fiscal policy and labour markets are factored in.
Forecasts should therefore be treated as rather vague approximations. The euro area will release its final February consumer price inflation data, but as this almost never changes from the initial reading, complete indifference is the likely market response. There are four central bank speakers from the European Central Bank on the agenda, but again markets remain relatively comfortable in the idea of further rate declines in Europe.
It seems unlikely that language from the speakers today is going to shift that view. The Bank of Japan behaved exactly as expected in keeping rates unchanged overnight. The accompanying statement flagged the uncertainty that exists around the trade outlook, and again that's hardly a surprise in the current climate.
Trump failed to get a comprehensive ceasefire agreement in Ukraine in a call with Russian President Putin yesterday. There is a limited ceasefire, which seems aimed at preventing Ukrainian attacks on Russian oil facilities. Europe is talking about accelerating arms shipments to Ukraine, which suggests less than complete faith in the direction of negotiations.
Financial markets had a reasonable degree of scepticism about a long-term peace deal being reached, so the failure to achieve any comprehensive ceasefire is not likely to change that much. That's all for today. Have a good day.
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