The election of Donald Trump as president could mean that a heretofore widely forecasted rate hike by the Federal Reserve in December might not happen.
The consensus following the release of the October employment situation from the Bureau of Labor Statistics was that a rate hike will take place at the Federal Open Market Committee’s December 14 meeting. While some in the industry still believe it could happen, others are not so sure, largely due to volatility in financial markets both overseas and in the U.S.
Mark Zandi, Chief Economist with Moody’s Analytics, said that Trump’s plans for tax cuts and for renegotiating foreign trade agreements “raises the odds that the Fed will not move in December,” according to Reuters [1]. Zandi’s team at Moody’s believes that possible immigration reform by Trump and could drive inflation up, which in turn would prompt aggressive moves by the Fed on interest rates—which could lead to a recession.
“Uncertainty tends to drives investors toward safe bets, such as US bonds, which pushes down mortgage rates and makes borrowing cheaper,” Trulia Chief Economist Ralph McLaughlin said. “This happened during Brexit as the world looked to a stable U.S. economy for safe harbor, but there’s an important difference between Brexit and a Trump victory: the US economy now looks less safe because we don’t know Trump’s policies toward trade. This is actually pushed bond yields higher this morning as investors hold off on purchasing U.S. bonds. At the same time, mortgage rates are falling because investors are seeing safe yields in U.S. mortgage backed securities, reflecting their confidence in the relative safety of the U.S. housing market. Furthermore, the Fed is likely to delay a December rate hike because of global economic turmoil.”
Donald Selkin, chief market strategist at National Securities in New York, told Reuters, “His tax cuts could open up a huge increase in the budget deficit and his trade sanctions could interrupt world trade. This could put us in a recession.”
Not everyone believes that a December rate hike is out of the question, however.
“It looks as though rates will fall, but the market moves today are already indicating that financial markets are pondering that the Trump effect could be positive for the economy,” Realtor.com Chief Economist Jonathan Smoke said. “We have almost five weeks before the December Federal Open Market Committee (FOMC) meeting, which will give the market plenty of time to digest the potential outcomes. While the market is now indicating a reduced probability of a short-term rate hike at that meeting, the Fed has repeatedly indicated that they would be data-driven in their decision. So, if markets calm down and November employment data look solid on December 2, a rate hike could still happen.”
Rick Sharga, Chief Marketing Officer with Ten-X, stated, “I don't believe that there will be any significant changes to interest rates, at least in the near term, since the underlying fundamentals that have led us into a low interest rate environment haven't changed. Interest rates are driven more by U.S. Treasury yields, which will continue to be impacted by the amount of foreign capital pouring in as investors look for safe havens from the volatility of foreign markets. Longer term, it's likely that we'll see the Fed raise rates in December, and probably two or three times next year. That, and Trump's desire to bring private capital back into the mortgage market in a meaningful way, will likely cause a modest increase in interest rates over time.”