Fed rate-hike odds approach 100% in anticipation of 'Trumpenomics'

A police officer keeps watch in front of the US Federal Reserve building in Washington, DC on Oct 12, 2016.
A police officer keeps watch in front of the US Federal Reserve building in Washington, DC on Oct 12, 2016.PHOTO: REUTERS

SINGAPORE (BLOOMBERG) - Analysts spent early November warning a Trump victory in the US presidential election would make the Federal Reserve less likely to raise interest rates. What happened instead is that it made a December increase almost a certainty.

Traders assign about a 94 per cent probability, the highest level this year, to a Fed move at its final meeting for the year on Dec 13-14, futures contracts indicate. Mr Trump's spending plans are driving expectations the Fed may pick up its pace of rate increases as inflation expectations climb.

The odds of a Fed move have surged from 68 per cent at the start of the month as inflation expectations surged.

"The outlook for US growth is probably a bit firmer for both 2017 and beyond," said Ms Su-Lin Ong, an economic and fixed-income strategist at Royal Bank of Canada in Sydney. "Markets have then stepped up to pretty much fully pricing a December move, although we do need to see greater clarity from Trump and his new administration."

Benchmark 10-year note yields were little changed at 2.22 per cent as of 10am in Tokyo, according to Bloomberg Bond Trader data. The price of the 2 per cent security due in November 2026 was 98 2/32.

The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, climbed as high as 1.97 percentage points on Monday.

A gauge of expectations for US consumer prices is climbing toward the Fed's 2 per cent inflation goal for the first time in two years.

The measure the central bank uses for its inflation target, the price index for personal consumption expenditures, registered at a year-on-year rate of 1.2 per cent in September.