Hawkish on Paper, Dovish in December?
The minutes of the October FOMC meeting, to be released this week, are expected to show a hawkish tone and highlight the divergence of views among Fed officials. The market remains divided on the likelihood of a December rate cut, but UBS analysts believe that the "totality of data" released before the December meeting is unlikely to be strong enough to deter the majority of members who want to support a third rate cut this year.
In their latest research note, UBS economists said the October minutes will illustrate the extent of the disagreement over the near-term policy direction. They said that, while the committee's internal stance is quite sharp, sentiment favoring another rate cut in December remains dominant. UBS also believes that incoming data up to that point and the "still-positive" flow of economic news will not significantly change the dovish outlook that has begun to form.
On the more cautious side, several officials, such as Atlanta Fed President Raphael Bostic and Kansas City Fed President Jeffrey Schmid, have signaled their desire to keep rates on hold. Bostic said he was "comfortable with the two previous cuts," but wanted to wait for the data before making a decision on the next step. Schmid, who opposed a rate cut in October, doubted the effectiveness of additional rate cuts in supporting the labor market, which he argued was also exacerbated by immigration policy and tightening. He believes the labor market problems are more structural than can be addressed simply by lower interest rates.
This view clashes with other, more dovish FOMC members, particularly Governor Stephen Miran, who is still pushing for a 50 basis point cut in December. This divergence is further exacerbated by the lack of official data following the longest US government shutdown in history, making it difficult to establish a strong context among the key stakeholders. This situation could make the minutes appear "tough" on one hand, while still leaving room for further easing in December.
However, UBS believes the available data will actually emphasize the risks of a weakening economy. They highlight weak holiday hiring reports and a growing number of layoff announcements, concluding that "downside risks remain unresolved." This means that while the October minutes may have sounded hawkish, the downside risk narrative could still be a strong reason for most Fed members to keep the option of a December rate cut alive. (asd)
Source: Bloomberg.com
