FOMC: Goldilocks or wake-up call?

• Saxo sees no change and an adjustment (cut) of the Federal Reserve Interest rate on Excess Reserves of five basis points.

• The market is looking for a dovish tilt to support the economy through lower Fed projections.

• Saxo is more concerned about future growth than inflation, but this is not part of the consensus agenda.

• If consensus is right: risk-on (long US equities, higher EURUSD).

• If Saxo is right: small risk off – a correction inside the present bull market as technical and valuations are extremely stretched, particularly relative to economic data and earnings.


The focus will be on deflation after weak readings on PCE and the GDP deflator. It’s sometimes lost on the market that the mandate for the Fed is “price stability” – and stability means prices levels that do not hurt business and economic activity.

A 1.5% inflation reading is hardly any real reason for concern as the near-totally random target of 2% is not at risk for now, but expect some wording to address this from the FOMC – both on the inflation shortfall, and also in the press conference questions regarding the IOER versus the Fed Funds rate.

We see inflation ticking up as we firmly believe that energy is 90% of the inflationary direction. With energy trading at the high end of recent ranges, expect higher (not lower) headline inflation; this is something the 5Y5Y inflation swaps reflect nicely.