It was a light week for economic data, but a tremendously weighty week for political events. The widespread expectation, supported by the majority of polling institutions, that Hillary Clinton would become the first female president of the United States, gave way Tuesday evening to the growing awareness that the world was changing in a different direction.
Republican President-elect Donald John Trump will be supported by a slim majority in the Senate (51/48) and a stronger majority in the House of Representatives (239/192). Global financial markets swooned on the results. Fortunately, U.S. markets were closed in the early hours of Wednesday and could not reinforce the panic selling. Soon after U.S. markets opened on Wednesday morning, stock prices stabilized and then accelerated through the day. With now two days of strong U.S. financial market performance following the shock of Trump’s campaign victory, we do not expect to see a repeat of the Tuesday night swan dive.
This is important for a variety of obvious reasons, not the least of which is the upcoming Federal Open Market Committee meeting of December 13/14. As long as nothing unexpectedly falls out of bed, the odds of a December 14 feds funds rate hike look strong. Charles Evans, President of the Federal Reserve Bank of Chicago, and well known interest rate dove, said this week that he thinks that a December rate hike looks reasonable. According to the fed funds futures market, the implied odds of a December 14 rate hike are now 71.5 percent. We look for good economic data and financial market performance between now and mid-December to allow the Fed to fulfill widespread expectations for a year-end rate hike.
We currently have two rates hikes in our forecast for 2017, one in June and one in December. The balance of risk for our interest rate forecast for 2017 appears to have shifted marginally to the upside with the results of the 2016 general election. If we have fiscal stimulus from the Trump administration, combined with a widening federal deficit, a lower unemployment rate and stronger inflation, then it would be reasonable to expect a slightly steeper trajectory for future fed funds rate hikes, maybe three in 2017 rather than two.
Much depends on the new administration’s ability to follow through on the strong rhetoric of the campaign.
For a PDF version of the Comerica Economic Weekly, including forecast tables and the variables calendar, click here: CMAEconWeekly 11-10-2016.