December Fed Rate-Hike Odds Fall Below 50% as Trump Leads Polls

  • Probability was 82% before initial results arrived, data show
  • Fed has refrained from raising rates after December hike

Is the Market Overreacting to the Election Results?

Swaps traders slashed wagers on a Federal Reserve interest-rate hike next month as a potential victory for Republican candidate Donald Trump raised the specter of financial market volatility that may deter policy makers from tightening monetary policy.

QuickTake The Fed Lifts Off, Barely

The market-implied chance of a December rate hike fell to as low as 47 percent, based on U.S. overnight indexed swaps that trade 24 hours a day. That compares to 82 percent at 5 p.m. in New York on Tuesday. The OIS-derived probability tends to be a few percentage points lower compared to calculations based on fed funds futures.

Treasuries surged on the prospects of a victory for Trump, who’s criticized officials from Fed Chair Janet Yellen to congressional leaders. Traders are less confident the U.S. economy can withstand a rate hike under Trump, who has vowed to rewrite economic policy, tear up existing U.S. trade agreements and is seen by investors as less predictable than his Democratic rival, Hillary Clinton.

“If Trump wins, and -- given the uncertainty that brings -- if markets are volatile in early December and uncertain about what a Trump administration looks like, the Fed may hold off,” said George Goncalves, the head of U.S. rates research in New York at Nomura Holdings Inc.

Fed policy makers had signaled that they were ready to raise rates next month after holding steady since liftoff from near zero in December. Their case grew more compelling after Labor Department data last week showed wages rose in October from a year earlier by the most since 2009, while employers added 161,000 positions, marking six straight years of monthly job gains.

Failing to raise rates at least once in 2016 may further undermine the Fed’s credibility. After increasing them for the first time in almost a decade last December, policy makers forecast they’d tighten policy four times this year. The prediction was slashed at subsequent meetings due to lackluster economic growth at home and abroad, causing three voters to dissent in September in favor of a higher benchmark.

“The Fed has been very cognizant of trying to avoid adding to the market uncertainty when there are shocks,” said Steven Englander, global head of Group-of-10 currency strategy in New York at Citigroup Inc., the world’s biggest foreign-exchange trader. “Given the kind of swings that we’ve seen in asset markets and the uncertainty that remains, I would say that they’ll probably be cautious.”

— With assistance by Lananh Nguyen

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