FOMC: Goldilocks or wake-up call? FOMC: Goldilocks or wake-up call? FOMC: Goldilocks or wake-up call?

FOMC: Goldilocks or wake-up call?

Macro 7 minutes to read
Steen Jakobsen

Chief Economist & CIO

Summary:  Consensus is calling for a dovish tilt from the Federal Reserve with investors banking on a risk-on push. Saxo, however, sees no change and an IOER cut resulting in a small risk-off move and a correction inside the present bull market.

• 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.
WTI crude (USD, y/y change) versus CPI (source: Federal Reserve Bank of St. Louis)
The collapse of energy prices from $86.70 in early October 2018 has translated into a soft period for inflation as seen here via the y/y drop in WTI crude oil. It’s now again moving towards positive, and past October it will move significantly higher.
US Inflation Swap (5Y5Y) versus CPI (source: Federal Reserve Bank of St. Louis)
Despite all the talk of deflation, the 5Y5Y as a proxy for future expected inflation has continued to move higher. We see this continuing as Congress discusses infrastructure spending and President Trump continues to support all manner of Modern Monetary Theory variants.

Saxo is more concerned about the growth outlook than deflation despite the “strong” Q1 data point. Most of the excess performance came from the current account (+100 basis points) as trade was impacted by the expected China-US trade deal set to end by March 31.

The Chicago Fed National Activity Index, or CFNAI, is our best proxy for actual growth in the US economy... and the signs are not good. We are operating under our new macro theme of False Stabilisation, which argues that great policy panic of early 2019 created a response in the form of of lower steering rates and yields, but that these are transitory in a world of no reforms and most central banks seemingly at a loss for new policy (and continuing with QE and variants thereof).

We continue to think the market is in a sideways formation after the strong run-up in Q1. We see the next risk infliction point coming in July/August where enough time will have passed for the market to realise that improvement in economic activity is not forthcoming, particularly not from a policy response of lower funding costs. That timeline also, and notably, moves us past the conclusion of the China-US trade deal.

Our risk outlook is neutral with a small overweight in long-term US fixed income relative to cash.

For more information about the FOMC decision, click here.
Click here for an excellent update from (chart and introductory analysis below).

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (
- Analysis Disclaimer (
- Notification on Non-Independent Investment Research (

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000

Contact Saxo

Select region


The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.