Fed’s October minutes will lean hawkish, but Dec rate-cut to remain in play: UBS

Investing.com--The upcoming FOMC minutes due later his week will likely lay bare the depth of division among policymakers at a time when markets remain divided over the chances of a December rate cut, but UBS believes the “totality of the data” expected before the December meeting will not be enough to deter the growing sentiment in favor of backing the third rate cut of this year.

“The October FOMC meeting minutes should showcase the extent of the disagreement over the near term decisions for monetary policy... While the October meeting minutes will shed more light on the division within the committee, we expect significant sentiment remained to lower rates in December. We also expect that the totality of the data that we expect to arrive by then won’t deter that sentiment, and that incoming news flow has not been positive,” the UBS economists said in a recent note.

While some officials, such as Atlanta Fed President Bostic and Kansas City Fed President Schmid, voiced concerns about inflation or signaled support for holding rates steady, UBS believes there is still a slim majority tilted toward further accommodation.

"I was comfortable with the last two rate cuts. As for the next one, we’ll have to wait and see. I want to rely on data to determine what policy is most appropriate," Bostic said in recent remarks. Schmid, who voted against the Fed’s decision to cut rates in October, flagged uncertainty about how effective another rate cut would be in supporting the labor market, which has been dragged down by policy uncertainty and crackdown on immigration that has kept a lid on labor supply. 

"I do not think further cuts in interest rates will do much to patch over any cracks in the labor market - stresses that more likely than not arise from structural changes in technology and immigration policy," Schmid said.

These views clash with others on the FOMC, who lean dovish, especially Governor Stephen Miran, who continues to call for another 50 basis point cut in December.

The lack of data following the longest U.S. government shutdown is unlikely to help foster cohesion among voting Fed members.

But UBS believes the data that will be at the Fed’s disposal will likely flag ongoing downside risks to the economy. 

"Holiday hiring reports have been weak, and layoff announcements are mounting...The downside risks are not out of the woods yet," UBS said.