US election: What does the result mean for monetary policy?

The US Federal Reserve (Fed) is expected to delay its next interest rate hike following Donald Trump’s victory in the presidential election, according to asset managers.

Trump’s scathing remarks about Fed chair Janet Yellen earlier in his campaign have caused some commentators to speculate the membership of the Federal Open Markets Committee – which sets monetary policy – may change in the near future.

Dominic Rossi, global CIO for equities at Fidelity International, said the probability of a December rate increase “has fallen sharply” following today’s shock result.

“The dollar, which has been trending higher in anticipation [of a Hillary Clinton victory], has consequently reversed,” he added.

“Both were threats to the bull market, and these have now been postponed. Monetary policy will remain accommodative.”

Ian Kernohan, economist at Royal London, agreed the Fed might delay its rate hike.

He added: “Trump’s fiscal stimulus plan would be supportive for US economic growth.

“However, with trend growth lower thanks to a productivity shortfall and structural demographic pressures, it is difficult to see the US economy growing much more rapidly without running into overheating inflation and a more hawkish Fed.”

However, not all commentators believed December was off the table.

Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management, argued that the US economy “retains reasonable momentum and, … if US asset markets stabilise, the Federal Reserve remains likely to raise rates in December”.

In the run-up to the election, Trump attacked the Federal Reserve and Yellen in particular for being “political” and bowing to pressure from president Barack Obama.

In an interview with CNBC in September, Trump said: “[The interest rate] is staying at zero because [Yellen] is obviously political, and she’s doing what Obama wants her to do …. They’ll keep them down even longer … because they want to keep the market up so Obama goes out and the new person that becomes president, let him or her raise interest rates and watch what happens.”

Stefan Kreuzkamp, CIO at Deutsche Asset Management, warned that this rhetoric could mean “closer congressional oversight” of the Fed, which could limit its ability to act in the event of another economic downturn.

David Lloyd, head of institutional fixed-income portfolio management at M&G Investments, added: “Much of what Trump has said suggests the balance of risks is towards a more hawkish Fed. 

“In the short term,” he said, “the market will obsess over whether Trump’s rhetoric softens somewhat – ie [he tries] to forge a constructive working relationship with Yellen. If he sticks with his campaign tone, the rates market could get quite lively.”

Outside of the US, Matthew Beesley, head of global equities at Henderson, said Europe could see “modest fiscal expansion with ECB-related stimulus in place to counter the short-term impacts of a slower US economy”.

However, investor attention is likely to switch to forthcoming elections in France and Germany and a constitutional referendum in Italy, he said.

“What price some further anti-establishment success and with it heightened risks to the already fragile growth outlook for Continental Europe?” he asked.

BlueBay’s Dowding added: “We would caution against jumping to hasty conclusions regarding the European Central Bank or upcoming European elections in France, Germany or Italy in the wake of this result.”