Good morning from Copenhagen.

Very silent start to the day in markets with no large moves across assets, as it seems like rates and the USD is taking a breather after yesterday’s urge from Warren and co. for Powell to come through with 75bps on Wednesday. The big question, with three Democrats calling for a 75bp cut, is whether this is a way of giving the Fed leeway to do 50 without being accused of accommodating Mrs. Harris – this makes 50bp even likelier.

The tricky thing about the Democrats all of a sudden calling for 75bp from a politically independent institution is that it will now be even more difficult to call out how markets will react to 25 vs 50 bp, and while the political urge for 75bp shouldn’t really move markets, both the long end of the curve and inflation swaps were up decently yesterday.

With 50bp now being the more likely outcome as the Fed has positioned markets for it themselves (likely intentional), the interesting thing will be how they update their economic projections. Markets ideally want the rhetoric to rhyme with slowing (but not alarming) employment and inflation, and for markets to continue their soft landing rally the projections for the unemployment rate can’t be changed a lot to the upside. Remember that the Fed is basically forecasting that employment will not move away from it’s long term equilibrium whatsoever (based on March projections), but given the weakness we have seen in NFP in August/September, it’s hard to imagine them keeping their projections constant – the question is rather how much they will move it up.

If they significantly raise the unemployment projection without sufficiently lowering the Fed Funds rate (e.g., projecting a 4.5% unemployment rate in 2025 while projecting the Fed Funds rate at 3.6%), it would create a very hawkish and risk-bearish setup.

Chart 1: Economic projections from the Fed