US bond yields have been on a tear since the Fed cut its policy rate last month, a counter-intuitive move that’s being attributed to a stronger-than-expected jobs market, and Donald Trump.
Last month, the US Federal Reserve Board cut the federal funds rate by 50 basis points. Since that moment, America’s bond yields have been on a tear.. The median projection of the members of its rate-setting body, the Federal Open Market Committee , flagged a further 50 basis points of cuts before the end of the year.
We’ll know more about the condition of the world’s largest economy and the near-term outlook for the federal funds rate this week, with more jobs data due on Friday and third-quarter GDP and core inflation data coming out on Wednesday and Thursday, respectively.The other – and perhaps stronger – influence at play, however, is the “Trump Trade,” or the range of bets investors and punters are placing on the prospect that Donald Trump will win the presidential election.
They’d be inflationary and contractionary because the cost of his tariffs would be passed onto US companies and then consumers.The loss of millions of immigrants would shrink the pool of labour, causing either higher wages for the remaining workers and/or reduced economic activity and higher prices because of the reduced availability of low-cost workers.
The prospect of bigger deficits and debt for an economy already with almost $US36 trillion of government debt has driven bond yields up. However, the likely higher yields and a stronger US dollar might also attract some flows of funds. The dollar has already been strengthening – it’s up 4 per cent this month against a basket of America’s major trading partners’ currencies – as one of the strands in the Trump trades.
Trump says he understands monetary policy better than the Fed’s chair Jerome Powell and, should he win, expects to have a say on interest rates.
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