Election Special: Don't count out a Fed hike just yet

11-09-2016

In the wake of Donald Trump’s unexpected win yesterday, the talk has been that the Federal Reserve will see too much uncertainty to raise the target rate in December. But from our standpoint, we don’t think the election result necessarily derails the FOMC’s decision to move.

When it comes to monetary policy, people’s initial reaction to market surprises is often to expect policymakers to back off making changes, but that isn’t always the case. The next Federal Open Market Committee (FOMC) meeting is more than a month away, leaving time for things to settle down and cooler thinking to prevail. We are talking about a body that is supposed to be apolitical and data dependent, and the economy has improved enough to warrant a move. The long end of the money market yield curve (9-12 months) has actually slightly steepened today, suggesting more optimism about the likelihood of inflation and higher rates in the longer term than there had been in the weeks prior to the election.

If you look at Brexit as any type of a gauge, recall that it took only a weekend and two business days for things to revert to relative normal in the market. Granted, Brexit has a unique context and different profile in that its enactment is several years from now, whereas Trump's swearing-in takes place in January. But the timetable is actually similar: policy doesn’t change overnight, cabinets don’t change overnight, advisers don’t change overnight. All of this takes time. As we go through the Thanksgiving holiday and the month flips to December, we think the market will start building a hike back in, one that could indeed still happen.