In wake of Trump win, focus may drift back to Fed and inflation

Fri Nov 11, 2016 8:46am EST
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By Sumanta Dey

BENGALURU (Reuters) - After Donald Trump's unexpected victory in the U.S. presidential election, investors may refocus in the coming week on the health of the world economy and any signs that years of rock-bottom interest rates and fiscal austerity are coming to an end.

Trump's victory poses a major challenge to the conventional wisdom on the global economy, which for years has relied on brisker cross-border trade and migration flows for growth.

Apart from a nearly across-the-board rise in sovereign bond yields, however, the markets have so far mostly shrugged off the election result - despite previous fears of a meltdown in the event of victory for Trump, who espoused fiercely protectionist positions on trade in his campaign.

Even the long-held view that the Federal Reserve will raise rates next month, a year after its initial step in that direction, hasn't budged at all. Fed Chair Janet Yellen's testimony to Congress on Thursday may set the stage for a year-end hike, despite the mild tightening in financial conditions in the past week.

Everything is up for reassessment.

"It will take time to gauge the global economic consequences of Donald Trump's surprise victory," JP Morgan's chief global economist Bruce Kasman wrote in a note.

"Forthcoming policy changes are likely to generate growth cross-currents, but they should reinforce the tilt toward global reflation." Trump's proposals represent both a negative supply shock from curbs on trade and immigration as well as a positive demand shock from new fiscal spending, he added.

With the U.S. economy close to full employment - the jobless rate was 4.9 percent in October - Trump's election promise to cut taxes and upgrade the country's aging infrastructure could provide a big boost to both growth and inflation.   Continued...

U.S. President elect Donald Trump speaks at election night rally in Manhattan, New York, U.S., November 9, 2016.   REUTERS/Mike Segar/File Photo