Abstract
Subject The Fed’s more hawkish stance underpins ‘Trumpflation’ trade. Significance The US Federal Reserve (Fed) signalled a faster-than-anticipated pace of 2017 monetary tightening in its interest rate meeting earlier this month, driving the dollar and US Treasury yields higher. International investors are positioning themselves to take advantage of reflationary economic policies once President-elect Donald Trump takes office next month. The policy-sensitive yield on two-year US Treasury bonds has risen to the highest level since late 2009 while the dollar index has surged to a 14-year high. Impacts The euro is likely to remain weak, keeping it on course to reach parity with the dollar for the first time since 2002 next year. Having peaked at 13.4 trillion dollars in August, the stock of negative-yielding debt is likely to continue to fall. Relations between the Fed and the Trump administration could deteriorate if the two criticise each other’s policies. If public investment does rise sharply, encouraging faster tightening, this could discourage and crowd out private investment.
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