Strange bedfellows: Donald Trump and the Fed

U.S. Federal Reserve building in Washington, D.C.
President Donald Trump’s stimulus policies could raise the storm flags at the U.S. Federal Reserve Building in Washington, D.C. by mid-2017 (source: dpa)
  • 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.

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