Trump's shock win: Will Fed reshape policies?

The US Federal Reserve building in Washington, DC.
The US Federal Reserve building in Washington, DC.PHOTO: AFP

While interest rate hike is expected tomorrow, focus is on Fed's forecasts

That United States interest rates will go up early tomorrow has already been priced in by global markets but there will still be intense focus on the announcement.

Attention will be directed mainly on whether the US Federal Reserve's forecasts on GDP growth, inflation and employment have been re-shaped by Mr Donald Trump's shock presidential win.

Analysts will also eye the Fed forecasts to determine if it will validate the markets' bullish assessment of the US economy or if it will strike a more cautious tone.

Some don't expect the Fed to make considerable changes to its guidance or to GDP, inflation and unemployment estimates as its policymakers have mentioned that they need more clarity on Mr Trump's policies.

"There are good reasons why the Fed might want to wait before taking a more aggressive rate-hiking path," said Mr David Kohl, Julius Baer's chief currency strategist and head economist in Germany. He cited a lack of detail on what Mr Trump's tax and spending policies are, as well as the stronger US dollar and increase in bond yields.

Meanwhile, stock markets are tipped to react favourably to the expected 0.25 percentage point rate increase - the second hike since December last year.

PACE OF RATE HIKE

The greenback's rise is based on anticipated miracles Trump spending will do. We will see whether the US economy will deliver on job creation and wage inflation.

CIMB ECONOMIST SONG SENG WUN

While last December's rate hike sparked a global sell-off in equities, analysts expect a more positive reaction this time as the move is likely to be seen as confirmation that the US economy and financial markets can digest higher rates.

Singapore rates are not expected to react if the Fed raises rates by 25 basis points as the move has already been priced in, Aberdeen Asset Management Asia analyst Lee Jin-Yang said.

The key three-month Singapore interbank offered rate (Sibor) that is used to price home loans had been flatlining at 0.87 per cent since July but jumped to around 0.925 per cent on Nov 9, after the US election. It was at 0.926 per cent on Monday.

Markets have been reacting to expected tax cuts and fiscal stimulus that Mr Trump may roll out after his inauguration in January but analysts pointed out that there is scant details on the policies.

The question is whether there may be more aggressive rate hikes next year due to the underlying strength of the US economy and the expected fiscal stimulus, CIMB economist Song Seng Wun said.

Mr Song said: "After Thursday, if markets see a more hawkish Fed policy for 2017, you will find the banks here charging more for loans."

He sees Sibor rising one percentage point next year given that the Sibor is highly correlated with US rates.

The prospect of more aggressive rate hikes is also lifting the US dollar, which has appreciated 2.6 per cent against the Singdollar since the US election. One greenback could buy S$1.4269 yesterday, up from S$1.3901 on Nov 8.

"The greenback's rise is based on anticipated miracles Trump spending will do. We will see whether the US economy will deliver on job creation and wage inflation. If that happens, there may be more aggressive rate hikes," Mr Song said.

A version of this article appeared in the print edition of The Straits Times on December 14, 2016, with the headline 'Trump's shock win: Will Fed reshape policies?'. Print Edition | Subscribe