The Federal Reserve’s
short-term policy outlook remains largely unchanged in the wake of the
US election results, although the prospect of more fiscal stimulus from
Washington could alter the central bank’s view on what constitutes
neutral rates for the economy.
Those views were echoed by Federal Reserve Vice Chair Stanley
Fischer, who said last week he welcomes expansionary fiscal policy in
the wake of Donald Trump’s election victory. The President-elect has
promised a massive spending program to rebuild American infrastructure, a
sign that fiscal stimulus could be be on the way early in his four-year
Trump swept to power last week after dominating battleground states
on route to an easy electoral college majority. The news triggered
initial volatility in equities before the market staged a massive rally
that sent the Dow Jones Industrial Average to multiple record highs.
Fischer, who is also a voting member of the Federal Open Market
Committee (FOMC), told a conference of the Central Bank of Chile that
the case for raising interest rates is “quite strong.” Fischer added
that expansive fiscal policy will increase the neutral rate and “ease
the task of monetary policy.”
Members of the FOMC “have commented that it would be useful to have
more expansionary fiscal policy… I’m on record with that,” Fischer said.
Market expectations for a rate hike at the Federal Reserve's December policy meeting topped 90% on Monday, amid growing optimism surrounding the effects of a Donald Trump presidency on the U.S. economy.According to Investing.com's Fed Rate Monitor Tool, odds for a rate hike at the Fed's December 13-14 meeting rose to 90.6%, up from 81.1% on Friday and compared to 71.5% in the days leading up to the election last week.The U.S. dollar rallied to an 11-month high against a basket of major currencies on Monday, boosted by rising U.S. yields. The dollar index was recently up 0.95% at 99.93, after climbing to 100.03 earlier, a level not seen since December 2015.Against the yen, the dollar was up 1.15% at 107.91, having risen to 107.96, its highest since June 3, while the euro was at 1.0751 after hitting the 10-month low of 1.0728 earlier in the day.The greenback has been boosted in recent sessions amid optimism that increased fiscal spending and tax cuts under a Trump administration will spur economic growth and inflation, which would ultimately lead to an era of higher interest rates.Meanwhile, the yield on the U.S. 10-year Treasury note was up 11.2 basis points at 2.229% in early morning trade in New York, after rising to as high as 2.238%, a level not seen since January 6. The yield on the 10-year note was below 1.8% in the days leading up to the election.The 30-year yield gained 9.5 basis points to 3.009%, while the two-year yield rose 6.9 basis points to 0.976%.U.S. yields have been on a tear following Donald Trump's U.S. election win last week, as traders reassessed the implications of a Trump presidency, with many seeing it ushering in higher economic growth and rising inflation.
After a historic week in which U.S. politics dominated market sentiment, investors will get back to the business of watching the Fed and economic data in the coming days.
One interest rate increase, possibly next month, may be enough to
bring U.S. rates to a neutral setting, Federal Reserve policymaker James
Bullard said on Wednesday.
"A single policy-rate increase,
possibly in December, may be sufficient to move monetary policy to a
neutral setting," Bullard said at a UBS conference in London.
jump in the U.S. dollar and government bond yields since last week's
election of Donald Trump to the U.S. presidency remained within the
range of the last year, he said.
"Equities and foreign exchange rates have been re-priced, but are well within the experience of the past year," Bullard said.
In testimony to the Congressional Joint Economic Committee, the
Q&A session focussed to a considerable extent on regulatory issues.
As far as monetary policy is concerned, Yellen suggested that the
evidence seen since the November meeting was still consistent with
expectations with a tighter labour market and a gradual rise in
The Fed would have to factor in any economic-policy developments, but
the evidence so far suggested the November expectations were still
valid, which implied that rates would be raised at the December meeting.
She stated that she could not foresee any circumstances where she would not serve her full term as Federal Reserve Chair.
Yellen commented that the market developments since the Presidential
election suggested that markets were expecting an expansionary fiscal
Such a package could have inflationary consequences and the Fed would
have to respond to developments, although she also emphasised that
there was a high degree of uncertainty surrounding the situation.
Yellen also strongly defended Fed independence and also stated that the dual mandate mattered to a lot of people.
St. Louis Fed President Bullard (FOMC voter) speaks:
Bullard will speak on a panel discussing the near-term path of policy:
which road ahead? We expect him to call for tighter monetary conditions
Kansas City Fed President George (FOMC voter) speaks: George speaks at a conference on oil and the economy. We expect no substantive monetary content.
The US dollar is trading at its highest level since 2003, as the prospect of a December rate increase by the Federal Reserve is seen increasingly likely.
The US dollar index,
a measure of the greenback against a basket of six other major
currencies, rose 0.3% Friday to close at 101.21. That was the index’s
tenth consecutive gain. The dollar has strengthened 4.2% over that
Greenback-denominated commodities experienced a volatile week of trading, with gold prices plunging to nine-month lows and oil futures also trading choppy.
Federal Reserve Chair Janet Yellen confirmed on Thursday the central
bank was leaning toward a December rate increase. Yellen said the case
for policy tightening had strengthened and warned about the dangers of
leaving interest rates so low. Earlier in the week, St. Louis Fed
President and FOMC member James Bullard also said he was considering
voting for higher interest rates next month.
The markets are almost certain the Fed will raise rates at the
conclusion of its December 13-14 FOMC meeting. The CME Group’s 30-day
Fed Fund futures prices, which convey the market’s views on US monetary
policy, indicate a 95.4% chance of liftoff next month. That’s up from
90.6% on Thursday.
Several batches of economic data this week added to the view the US economy was ready for another rate adjustment. Weekly jobless claims fell by 19,000 to 235,000,
the lowest level since 1973. US consumer price inflation also
strengthened to 1.6% in the 12 months through October, official data
The fundamental picture of the US economy is unlikely to change next
week, as investors parse through a steady stream of economic data. On
Tuesday, the National Association of Realtors (NAR) will report on
October existing home sales. Reports on durable goods orders, new home
sales and consumer confidence will be released on Wednesday.
The minutes of the November FOMC meeting will also be released
Wednesday. The Fed kept monetary policy unchanged in November, as
expected, but set the stage for a potential shift in course in December.
shows the only place for interest rates to go from here is higher —
according to veteran technical analyst Louise Yamada.
Looking at a chart of U.S. interest rates over the last two centuries, Yamada pointed to a bottoming formation that has been in place for the last several years.
been looking at the process that we think has been taking place over
the last six to eight years in our interest rates, and we think now that
the 2012 low probably is going to prove to be the low just the way 1946
proved to be the low in the last cycle," the head of Louise Yamada
Technical Research Advisors said Thursday on CNBC's " Futures Now ."
yield on the U.S. 10-year has surged to 2.3 percent following the
election on higher inflation expectations under President-elect Donald Trump and the potential for a Fed rate hike next month.
think it would be very healthy [to raise rates]," explained Yamada. "We
are definitely watching 3 percent because that's going to be the
ultimate level at which we can definitively say that rates have
reversed." That 3 percent also corresponds with the 1980 downtrend on
are looking at the formation of the higher low, and the 10-year note
would have to put in place a slightly higher high to define the real
technical evidence of the reversal," she added.
Yamada said that higher rates will boost equity prices in the near
term, as past cycles have signaled a boom in stocks and the economy.
early stage of a bull market can be accompanied by the initial rising
rate cycle," she said. "It isn't until you get to about 5 percent that
you start having problems."
The USD has had a remarkable couple of weeks given the re-pricing of
Fed expectations for next month (now 90%+ probability of a hike
according to fed funds futures) along with a steeper path for hikes in
the year to come (Figure 2). Although we agree that the potential for
inflation to pick up is real, expectations regarding the path for
monetary policy have moved in line with our expectation.
On the other hand, we
think that the second leg of the USD rally needs to be confirmed by
real policy plans, something that we have not seen so far. In this regard, the
USD will be reactive to nominations on the new cabinet that could shape
the outlook for fiscal, trade, security and immigration policy for the
next few years.