By Kate Davidson
Donald Trump's electoral victory, by roiling global financial markets and creating political uncertainty, could upend Federal Reserve officials' plans for raising short-term interest rates at their meeting next month.
Investors had widely expected Democratic nominee Hillary Clinton to prevail in the presidential contest, and put the probability of a Fed rate increase in December at 81% Tuesday afternoon, according to CME Group. That figure dropped to 67% Wednesday morning amid a widespread stock selloff overnight, a sharp rise in the dollar and soaring gold prices. However, U.S. markets showed stability Wednesday morning, with stocks up slightly, the dollar recovering and gold shedding some gains.
Fed officials voted to leave rates unchanged at their Nov. 1-2 meeting, in part because of concerns over the market turbulence that could stem from the election outcome. But they sent new signals in their postmeeting policy statement that they could move at their Dec. 13-14 meeting, barring any major changes to their economic outlook.
Mr. Trump's victory could be the major change that puts those plans on hold.
"The Yellen Fed hates uncertainty, and falling stock prices, and tends to react to both by not doing what it had previously planned to do," Pantheon Macroeconomics chief economist Ian Shepherdson said in a note to clients Wednesday morning. "We aren't yet changing our formal forecast numbers, but as of right now the chance of a December hike probably is no more than one in three."
The Fed raised its benchmark federal-funds rate to a range between 0.25% and 0.50% in December 2015 and has held it steadysince then amid a variety of risks, including slow economic growth earlier this year and market turbulence from abroad.
In a statement following their policy meeting last week, officials suggested they were closer to raising rates than they had been all year, noting they only needed to see "some further evidence" of economic improvement before raising rates again.
Mr. Trump's win could create enough volatility to give the Fed pause when it meets in five weeks. Economists and analysts said the move depends greatly on how the market reacts in the days and weeks ahead, and a rate increase isn't off the table.
"We are not going to rush into changing our call for a rate hike at the December meeting," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics. "A lot can happen in five weeks."
Beyond December, however, Mr. O'Sullivan said his firm could boost their expectations for Fed rate increases if the market fallout is limited and the economy remains resilient, but Congress moves to slash taxes.
"For now, though, the downside risks look much greater than upside risks, " he said.
Mr. Trump's victory also could usher in a level of political pressure on the central bank not seen in decades, as well as uncertainty about its leadership.
Although his views on the Fed and monetary policy have wavered over the past year, Mr. Trump in recent months has blasted the Fed and its chairwoman, Janet Yellen, whom he accused of creating a "false economy" by keeping interest rates "artificially low" to help President Barack Obama and, by extension, his Democratic opponent Hillary Clinton.
Ms. Yellen "should be ashamed of herself," Mr. Trump said Sept. 12 in an interview with CNBC. "I used to hope that the Fed was independent," he said. "And the Fed is obviously not independent. It's obviously not even close to being independent."
That wasa turnabout from May, when he said he had "great respect" for the Fed chief and didn't think she was doing a bad job. Mr. Trump said then that he favors low interest rates "unless inflation rears its ugly head."
While the central bank isn't immune to criticism from politicians, Mr. Trump's remarks drew rebukes from his rival, Mrs. Clinton, and from economists and other officials who warned they would undermine the Fed's independence.
Mr. Trump has said he probably wouldn't nominate Ms. Yellen to continue as Fed chief after her term expires in early 2018, and would instead prefer to tap a Republican for the job. Since he has criticized Ms. Yellen for holding rates low, investors might expect his pick to raise rates more aggressively.
At the least, his comments suggest he might hew less closely to the tradition in recent decades of presidents not commenting on Fed monetary-policy decisions.
"The Fed's credibility is goingto be under pressure, and that's an international story, not just a national story," said Quentin Fitzsimmons, a global bond manager at T. Rowe Price, adding that the pressure and greater market volatility could induce the Fed and other central banks to "temporarily stall on their path toward tightening."
Mr. Trump also could have an opportunity to reshape the Fed's board of governors. There are already two vacancies on the seven-member board, and Fed governor Daniel Tarullo -- the Fed's point man on bank supervision and regulation -- is widely expected to depart when the next administration takes over.
The Fed also has faced many proposals on Capitol Hill to subject it to additional congressional scrutiny, including measures to audit its monetary-policy decisions and require policy makers to adhere to policy rules when setting interest rates. Those measures, which failed to advance under a Democratic administration, could have new life with a Republican in the White House and the GOP controlling both chambers of Congress.
Jon Hilsenrath contributed to this article.
Write to Kate Davidson at firstname.lastname@example.org
(END) Dow Jones Newswires
November 09, 2016 11:14 ET (16:14 GMT)
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