NEW YORK • Analysts spent early this month warning that a victory for Mr Donald Trump in the United States presidential election would make the Federal Reserve less likely to raise interest rates. What happened instead is that it made a December increase a near certainty.
Traders assign about a 94 per cent probability, the highest level this year, to a Fed boost at its final meeting for the year from Dec 13 to 14, futures contracts indicate.
Mr Trump's spending plans are driving speculation that the Fed will pick up its pace of rate increases as inflation expectations climb.
"It's hard not to think this is incredibly reflationary for the global economy," said Mr Mark Nash, the head of global bonds in London at Old Mutual Global Investors. "We believe there should be more hikes priced in and bond yields should rise," he said on Tuesday in an interview on Bloomberg Television.
The Federal Open Market Committee said on Nov 2 that the case had strengthened to raise rates.
Fed officials project one rate increase this year and two next year, according to the quarterly median estimate submitted by policymakers for their meeting in September.
One interest rate increase in the US, possibly next month, may be enough to bring Fed rates to a "neutral setting", one of the central bank's policymakers, Mr James Bullard, said yesterday.
Mr Bullard has argued that the US economy has been saddled with persistently low growth, so there is little need to raise interest rates much. He has also previously called for one increase this year and to then keep them on hold for an extended period of time.
The jump in the US dollar and government bond yields since last week's election remained within the range of the last year, he said, and rising inflation expectations had eased some of the Fed's concerns about overly low inflation.
The odds of a Fed move by next month have risen from 68 per cent at the start of this month as inflation expectations surged. Treasury 10-year note yields rose three basis points, or 0.03 percentage point, at 2.25 per cent as of 9.28am in London yesterday, according to Bloomberg Bond Trader data.
Traders are waiting for Fed chairman Janet Yellen's testimony to the Joint Economic Committee of Congress today, where she may discuss her outlook for the US economy and monetary policy.
"The inflation story is still in play", with a rally in oil prices on hopes that Opec members are discussing a cut in output also driving inflation expectations, said Ms Birgit Figge, a fixed-income strategist at DZ Bank in Frankfurt. "The market is expecting an interest rate hike in December, and there is no fundamental reason for the Fed" to disappoint, she said.