THE FED AND TRUMP'S ECONOMIC POLICY

THE FED AND TRUMP'S ECONOMIC POLICY

Beyond the Fed’s quarter-point interest rate increase, it as the “light in the tunnel” that came afore; and this was the potential interest rates in the future. In its present state, the Fed is likely to raise at least 3 times the interest rate in 2017 by 0.25 each.

Based on this scenario, the minimum level that the Fed’s interest rate hike at the end of 2017 will be 1.50. The Fed’s economic forecasts seem to be very strong as they support this potential interest rate hike; the economy is almost at full employment level. If then, the interest hikes may become stronger.

Such a change in the outlook of interest rate increase regarding 2017 means bad news for the U.S. high yield bonds; it is the same for the emerging countries. This picture has strengthened the expectations regarding the movement of the interest rates of U.S. 10-year note to a level above 3 percent.

It seems that the Fed is reacting to the fast-changing expectations of the market regarding Trump’s potential economic policy instead of performing a calibration of its policy in accordance with it. Thus, the Fed is considering the probable change in the fiscal policy after Trump. Whatever is the situation, the Fed has warned the markets; “we can speed up!”.

The yield on the U.S. 10-year note which was 1.54 percent in July is now 2.5 percent. This picture has strengthened the prospective raise of the interest rates. By moving into 3.00-3.50 territory, the emerging markets’ bond yields will be forced to move upwards in a similar fashion and will also force the reverse flow in the capital flow that constitute the portfolio investments. And the economic stagnation that will follow will be a threat to the current sovereign ratings of the emerging countries.