WASHINGTON • Mr Donald Trump's victory in the US presidential race throws into question the core assumption in global financial markets that the Federal Reserve would raise interest rates soon and follow with further gradual hikes over the coming years.
Financial markets swooned after Mr Trump's win, with the US dollar and stocks sinking and safe-haven sovereign bonds and gold shooting higher, reflecting fears of prolonged global uncertainty over the Republican's policies.
Swaps traders slashed wagers on a Federal Reserve interest rate hike next month as a Trump win raised the spectre of financial market volatility that may deter policymakers from tightening monetary policy.
The market-implied chance of a December rate hike fell to as low as 47 per cent, based on US overnight indexed swaps that trade 24 hours a day. That compares with 82 per cent at 5 pm in New York on Tuesday.
Market turmoil has stayed the Fed's hand in the past, including a Chinese stock market slump last year and the aftermath of Britain's vote to leave the European Union in June. Investors have tended to favour Mr Trump's Democratic rival, Mrs Hillary Clinton, as a status quo candidate who would be considered a safe pair of hands at home and on the world stage.
Mr Trump has pledged to tear up or re-negotiate international trade agreements, which could set off a wave of protectionism, threatening to stall a tentative global economic recovery. His economic plans call for massive tax cuts that many economists estimate would sharply boost the US budget deficit. "It raises the odds that the Fed will not move in December," said Mr Mark Zandi, chief economist of Moody's Analytics, of Mr Trump's victory.
Mr Trump's win also casts doubt over Fed chair Janet Yellen's future. He has accused the Fed of keeping interest rates low to help Democratic President Barack Obama and indicated he might replace Dr Yellen after her term ends in January 2018, leading analysts to speculate on whether she would resign earlier.
Fed policymakers had signalled that they were ready to raise rates next month after holding steady since lift-off from near zero last December.
Their case grew more compelling after Labour Department data last week showed wages rose last month from a year earlier by the most since 2009, while employers added 161,000 positions, marking six straight years of monthly job gains.
Failing to raise rates at least once this year may further undermine the Fed's credibility. After increasing them for the first time in almost a decade last December, policymakers forecast they would tighten policy four times this year.
The prediction was slashed at subsequent meetings owing to lacklustre economic growth at home and abroad, causing three voters to dissent in September in favour of a higher benchmark.
"The Fed has been very cognisant of trying to avoid adding to the market uncertainty when there are shocks," said Mr Steven Englander, global head of Group of 10 currency strategy in New York at Citigroup. "Given the kind of swings that we've seen in asset markets and the uncertainty that remains, I would say that they will probably be cautious."