December Fed hike still a “strong” possibility

President-elect Donald Trump may have beat the odds in this week’s election, but that hasn’t swayed the U.S. Federal Reserve.

In a speech this morning, Fed vice-chairman Stanley Fischer “made comments today suggesting that the FOMC continues to be on the path of hiking rates in December,” says director Nick Exarhos in CIBC Capital Markets commentary.

Read: Why to leave rate-senstitive sectors now

He adds, “[Fischer] highlighted that the Fed is ‘reasonably close’ to achieving its dual mandates relating to both inflation and employment. As a result, he suggests that the case for tightening policy remains ‘quite strong.’ And though potential volatility could have been a fear before the November 8 [election] decision, Fischer characterizes financial conditions as still having improved,” compared to the beginning of the year.

In fact, Fischer seems optimistic about Trump’s economic plans. Says Exarhos, “the vice-chair mentions fiscal policy could ease the burden placed on monetary policy. That last statement could imply more tightening over the next few years than the market expects if President-elect Trump is able to execute some of his planned stimulus.”

Read: Fiscal policy push or helicopter money: what’s on the horizon?

CME Group’s current FedWatch reading also points to a possible rate hike in December. As of 12:20 pm on November 11, there was a 76.3% chance of the Fed raising rates at its next meeting, versus a 71.5% chance yesterday.

Monetary policy and global events

During his speech, Fischer spoke about how U.S. monetary policy affects the global economy. He noted, “Given the importance of the United States in international trade and in the global financial system, the monetary policy actions of the Federal Reserve influence the global economy through a wide range of trade and financial channels.”

But, he also touches on how U.S. monetary policy can easily be influenced by global events. Fischer points to the strong links between “domestic and foreign financial intermediaries–[think of] banks, the nonbank financial sector and insurers, among others […].” During the 2011-2012 sovereign debt crisis, for example, the Fed tightened U.S. financial conditions to protect its economy.

Read: How to match bond exposure to rate outlook

Fischer notes that foreign developments can also influence U.S. output and inflation. He highlights that “about one-eighth of the goods and services produced in the United States are exported, [so] a sizable component of U.S. aggregate demand depends on foreign consumption and investment decisions.”

Staff

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