UBS On-Air: Paul Donovan Daily Audio 'Will it be Warsh?'
Lead — The potential nomination of former Fed Governor Warsh as Fed Chair under President Trump introduces increased uncertainty surrounding future U.S. monetary policy. Per the full note from UBS, Warsh's historical hawkish tendencies raise questions about his ability to steer the Fed toward aggressive rate cuts, especially amid political pressures and a potentially divided FOMC. Given that the bond market's sensitivity to political influence has intensified, the path forward may be constrained despite the speculation around technological disinflation promoting lower rate scenarios. Overall, the outlook will be shaped by both Warsh's confirmation process and the market's reaction to the Fed's evolving stance.
What the desk is arguing
The desk posits that Warsh's nomination could significantly influence U.S. interest rates, with an emphasis on his previous hawkish leanings. UBS economists imply that while there may be room for disinflationary sentiment tied to technology, it does not necessarily warrant a swift pivot toward lower rates. Warsh's influence may be tempered by external political pressures, particularly given ongoing legal challenges against the Fed that could affect Senate confirmation.
Supporting evidence centers on the current political landscape and the reaction of bond markets to such nominations. As Donovan suggests, the historical context indicates skepticism around how much power a new Fed Chair would have to convince the markets, given their current hypersensitivity to political factors.
The alternative read would consider the possibility that technological disruption could create greater deflationary pressure faster than anticipated. However, this scenario doesn't fully account for the potential for rising prices via technology, complicating any straightforward narrative around rate cuts.
Where it sits in our coverage
In our coverage, the consensus target for USD/EUR stands at 1.075, with forecasts ranging from 1.04 to 1.12 based on insights from: - JPMorgan: 1.10 (Mar-26) - BofA: 1.04 (Mar-26)
This view leans slightly towards the lower end of the group spread, suggesting that our desk’s cautious stance aligns with concerns from bofa on the immediate impacts of a potential Warsh nomination on currency valuations.
How other firms see it
Several firms exhibit a consensus that aligns with a cautious view on rate cuts, reflecting similar sentiments toward geopolitical risks affecting monetary policy. Notably, jpmorgan supports the view of moderate targets amid anticipated volatility. In contrast, bofa expresses a more pessimistic projection, signaling a divide in anticipated Fed actions.
Watch USD/EUR closely, especially given that shifts in the Fed’s communication strategy may echo through subsequent Eurozone monetary policy decisions, setting a complex interplay between central banks that traders should monitor.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Potential Warsh nomination heightens monetary policy uncertainties.
- 02Political pressures may hinder aggressive rate cuts from the Fed.
- 03Bond market reactions will be pivotal in Warsh's effectiveness as Fed Chair.
- 04Concerns over tech-driven disinflation face counterarguments regarding price rises.
Market implications
Traders should watch the 1.075 level in USD/EUR as a critical support level. Ahead of any nomination announcements, fluctuations could be significant, especially given the uncertainty surrounding Senate confirmation timelines and bond market reactions.
Risks to this view
The primary risk to this outlook stems from potential shifts in Senate dynamics that could delay or block Warsh's nomination. Additionally, unexpected economic data showing strong inflation could undermine supportive arguments for rate cuts and push the Fed towards a more hawkish stance.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 30th of January. There is considerable speculation that former US Federal Reserve Governor Walsh will be announced today as US President Trump's nomination for the position of Fed Chair.
The process still requires Senate confirmation and there are questions over the speed with which that happens as the Trump administration still has legal challenges against the Fed that Republican members of the Senate are unhappy with. Walsh's impact as a Governor was not, perhaps, notable, though there was a hawkish tint to their views at that time. Now Walsh seems to have drunk the Artificial Intelligence Kool-Aid and sees disinflation potential from technology.
Of course, AI is not really affecting pricing, productivity or efficiency generally right now and new technologies like AI can often raise prices as well as lower them. Technology is generally a relative price shock, not a general price shock. Does this then mean a bias to lower US interest rates?
It's too soon to rush to that conclusion. Some kind of insurance rate cut to protect against the fear of unemployment would seem to be prudent at some point in the coming months. However, to get more aggressive rate cuts, Walsh would have to convince the bond markets, which are perhaps hypersensitive to the risks of political interference.
The power of the bond market vigilantes is almost certainly greater than that of a Fed Chair Walsh. Walsh will also have to convince a majority of the FOMC. In the past, this would not really have been so much of an issue as the Fed Chair has a tradition of having deference paid to them.
Recently, there has been more open dissent within the Fed and the FOMC has acquired some of the Bank of England's approach of laissez-majester towards the central bank head. The mix of European data today is likely to show a steady, if somewhat dull, economic performance. The German and the Spanish preliminary December consumer price inflation figures are expected to be unexciting, around 2% for Germany and rapidly moderating towards 2% for Spain.
There's nothing here to cause a flicker of interest in ECB policy. The only real value of this data might be comparative. While inflation illusions might create an affordability issue in Europe, there's no real sense of inflation doing any damage to consumer spending power.
It's this fact, producing a steady growth in European consumer real incomes, that is giving a solid foundation to euro area growth. On that point, the preliminary French fourth quarter GDP showed a trend-like 1.2% year-on-year rate of growth, in line with expectations. The United States is offering up producer price inflation for December.
Sources & References
How we cover this story