Focus turns to the Fed after few policy clues from Trump
Trump’s address to Congress was light on detail but his job creation plans pose inflationary risk, and Fed officials are already taking a more hawkish tone.
Unstructured Learning Time
Strong on rhetoric but short on detail, President Trump reiterated his promise to “make America great again” in his address to Congress last night and he repeated many of the themes from his successful election campaign.
Job creation plans appear inflationary
However, there was little of the detail which the market is craving on his tax plans except for a promise to “provide massive tax relief for the middle class” and “a $1 trillion investment in the infrastructure of the United States - financed through both public and private capital - creating millions of new jobs”.
Where the labour will come from in an economy close to full employment and which is tightening immigration laws remains to be seen. This is one reason why we remain wary of the inflationary implications of the president’s policies.
Rising odds of an imminent rate hike
More immediately, members of the Federal Reserve’s (Fed) interest rate setting committee are sounding more hawkish. William Dudley, president of the New York Fed and a well-known dove, noted the improvement in "animal spirits" since the election and that the risks to the outlook were tilting toward the upside. San Francisco Fed President Williams said that a March rate hike is getting “serious consideration” given that the Fed is “very close” to achieving its goals on employment and inflation.
The odds on a rate hike at the next meeting on 15 March have risen significantly to over 80% according to Bloomberg. Whilst our forecast is for a rise in June, there is a case for going earlier.
The Fed is keen to normalise interest rates and, with the personal consumption deflator expected to come in at 2% for January alongside low unemployment, there is an argument for another 25 basis point rise later this month. There is a danger that, by waiting for June, softer data may close the window on a rate move.
All eyes will now be on Janet Yellen when she speaks in Chicago on Friday – her last opportunity to comment publicly ahead of 15 March.