UBS expects the April FOMC to stay on hold, but communication may turn slightly more hawkish

Overview

This is a UBS U.S. economics weekly report, centered on a preview of the April FOMC meeting, the combined effects of high oil prices and tax refunds on U.S. consumers, progress on tariff refunds, retail sales and manufacturing data, and the path of the Federal Reserve's balance sheet. The main message is that the policy rate itself is highly likely to remain unchanged, but rising inflation risks may make FOMC communication slightly more hawkish than in March.

Core views

UBS believes that the labor market has not deteriorated materially over the past eight weeks, while energy prices remain above levels before the March meeting, so the FOMC's characterization of risks should focus more on upside inflation pressure. However, the report also emphasizes that the more likely hawkish option in the near term is staying on hold for longer, rather than raising rates soon. Powell may not rule out future rate hikes at the press conference, but he is not expected to describe hikes as a realistic option over the next few meetings. If Warsh succeeds as Chair, it would open a new phase of Federal Reserve communication, but actual policy changes would still be constrained by the structure of FOMC participants.

Analysis framework

The report uses a combination of event preview and high-frequency macro tracking: it first breaks down possible changes in the FOMC statement and press conference, then uses oil prices, tax refunds, retail sales, jobless claims, manufacturing surveys, housing, and balance sheet data to assess the U.S. economic and policy communication environment.

Methodology notes

• monetary_policyFOMC communication analysis

  policy communication outlook

  By comparing the wording of the March FOMC statement, changes in April macro data, and potential questions and answers at the press conference, the report assesses whether the April meeting will adopt more inflation-focused language in its risk assessment.

• consumer_macrogasoline spending and tax refund offset

  consumption shock offset analysis

  The report compares the additional spending pressure from higher gasoline prices with the disposable income support from larger income tax refunds to assess consumption resilience across income groups.

• balance_sheetFederal Reserve balance sheet projection

  reserve management purchase forecast

  Based on the lower purchase pace already announced by the New York Fed, UBS adjusts its reserve management purchase assumption to about $25 billion per month in 2026 and expects purchases may be increased again in the future to maintain ample reserves.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. rates

  FOMC communication and inflation risks directly affect rate expectations

  Strengths

  If policy stays on hold but emphasizes inflation risks, the market may continue pricing a longer pause.

  Weaknesses

  If the economy or labor market weakens, rate-cut expectations may reheat.

  Comparison

  The report believes that extending the pause is more likely in the near term than entering a rapid rate-hike path.

  Risks

  If Powell's wording is more hawkish or more dovish than expected, yields could be repriced.

• Crude oil and gasoline-related consumption

  High oil prices directly raise gasoline spending and affect real consumption

  Strengths

  Higher oil prices boost energy company revenue and nominal gasoline sales.

  Weaknesses

  High oil prices squeeze household disposable spending, with lower-income and rural households hit harder.

  Comparison

  Tax refunds can partly offset the shock, but the report believes this year's real consumption tracking is about 0.2 percentage points lower than in February.

  Risks

  If the Middle East situation pushes oil prices even higher, both the drag on consumption and inflation risks will increase.

• U.S. consumption-related assets

  Retail sales, tax refunds, and gasoline prices jointly affect consumption resilience

  Strengths

  Non-gasoline retail components in March remained fairly solid, and tax refunds above last year's level provide support.

  Weaknesses

  Higher gasoline spending may crowd out other consumption, and savings buffers are uneven across the income distribution.

  Comparison

  Higher-income households spend more dollars, but gasoline spending accounts for a higher share among low- and middle-income households.

  Risks

  If tax refund support is concentrated in certain groups or arrives with a lag, the improvement in consumption may be uneven.

• U.S. dollar and risk assets

  More hawkish Fed communication may affect the dollar, equity valuations, and risk appetite

  Strengths

  Economic data have not yet shown a clear deterioration in the labor market, and manufacturing surveys have improved.

  Weaknesses

  Services surveys are soft, and housing remains affected by rising mortgage rates.

  Comparison

  The macro environment is one in which growth remains acceptable, inflation risks are rising, and a policy pause coexists.

  Risks

  If both inflation risks and downside growth risks intensify, risk assets may face valuation pressure.

Key data

• April FOMC policy expectationno changeUBS explicitly states that it does not expect the April FOMC to change its policy stance.
• Q1 real GDP tracking2.2% saarUBS estimates U.S. real GDP growth in the first quarter at an annualized 2.2%, supported by technology/AI capex and a rebound in federal government activity.
• Gasoline price changerose from about $3.00/gallon to about $4.00/gallonThe report says gasoline prices rose as high as $4.17 since February and then stabilized at about $4.00, for an average increase of about 25%.
• Estimated additional gasoline spendingabout $90 billion annualizedAssuming no demand destruction, higher gasoline prices imply about $90 billion in additional annualized gasoline spending.
• Year-over-year increase in tax refundsabout $50-60 billion, up about 15%The pace of income tax refunds is higher than last year and may partly offset the drag of high oil prices on consumption.
• IEEPA tariff revenue scaleabout $160-170 billionCBP court filings estimate the scale of tariff revenue collected under IEEPA, but the coverage ratio of the first stage of refunds is uncertain.
• CBP refund timinggenerally 60-90 days after acceptanceIf there is a compliance review, the refund time may exceed 90 days.
• Reserve management purchase paceabout $25 billion/month through year-endUBS expects the Fed's reserve management purchases to continue through year-end at the lower pace of about $25 billion per month.
• March retail and food services sales1.7% m/mMarch retail sales rose significantly, driven by gasoline, but non-gasoline components also remained fairly solid.
• April University of Michigan 5-10 year inflation expectations3.5%Long-term inflation expectations remain an important backdrop for cautious FOMC communication.

Impact & implications

For markets, the report implies that the main risk at the April meeting is not an actual rate hike, but rather that the statement or press conference reinforces inflation risks, which could support a longer rate pause and higher yields. For consumers and businesses, high oil prices are eroding the income support from tax refunds, with lower-income and rural households more vulnerable; although tariff refunds have made legal and administrative progress, disbursement is slow and procedures are complex, limiting the short-term macro boost.

Risks

• Further increases in Middle East tensions and energy prices could push up inflation and weaken real consumption.
• FOMC statement or Powell press conference wording could be more hawkish than market expectations, triggering a repricing of rates.
• Weakening labor market or services data could force adjustments to the current policy path of an extended pause.
• The tariff refund process is complex and phased, with actual disbursements arriving more slowly than expected, limiting macro stimulus.
• There is uncertainty around Warsh's communication style and policy preferences after taking office, which could change the market's understanding of the FOMC reaction function.

What to watch

• Whether the April FOMC statement adds language about rising inflation risks or more balanced risks.
• Whether Powell's press conference explicitly discusses conditions for future rate hikes, rate cuts, or a prolonged pause.
• The progress of Kevin Warsh's nomination and assumption of office, as well as his comments on the balance sheet and the boundaries of the Fed's mandate.
• Whether gasoline prices, consumer confidence, retail sales, and real PCE show that high oil prices are beginning to crowd out other consumption.
• The speed of progress in the CBP tariff refund system, the pace of corporate applications, and the actual timing of refund disbursements.
• Next week's durable goods orders, trade and inventories, housing starts and permits, Q1 GDP, ECI, and ISM manufacturing data.