NEW YORK (REUTERS, BLOOMBERG) - Donald Trump’s victory in the United States presidential race throws into question the core assumption in global financial markets that the Federal Reserve will raise interest rates soon and follow with further gradual hikes over coming years.
Financial markets swooned after Mr Trump’s win, with the dollar and stocks sinking and safe-haven sovereign bonds and gold shooting higher, reflecting fears of a 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 specter of financial market volatility that may deter policy makers 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 to 82 per cent at 5 p.m. in New York on Tuesday.
Market turmoil has stayed the Fed’s hand in the past, including a Chinese stock market slump in 2015 and the aftermath of Britain’s vote to leave the European Union last 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 renegotiate 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 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 Ms Yellen after her term ends in January 2018, leading analysts to speculate on whether she would resign earlier.
Fed policy makers had signaled that they were ready to raise rates next month after holding steady since liftoff from near zero in December.
Their case grew more compelling after Labor Department data last week showed wages rose in October 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 in 2016 may further undermine the Fed’s credibility. After increasing them for the first time in almost a decade last December, policy makers forecast they’d tighten policy four times this year.
The prediction was slashed at subsequent meetings due to lackluster economic growth at home and abroad, causing three voters to dissent in September in favor of a higher benchmark.