- Markets are expecting a short-term fiscal stimulus from the Trump administration
- The U.S. Federal Reserve has been calling for such expansionary policies for months
- But the Fed may turn hawkish after inflation expectations shot above 2 percent
- That sets up a policy clash with severe repercussions for the global economy
The election of Donald Trump as the next president of the United States produced a strong reaction in global financial markets. Stocks rallied, but even more interesting was the significant strengthening of the U.S. dollar and a spike in bond yields – both driven by higher inflation expectations.
What the financial markets are telling us is not just what economic policies a Trump administration and a Republican-controlled Congress will pursue, but also how the Federal Reserve will react to these policies.