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Donald Trump’s surprise victory in the US presidential election will not derail the Federal Reserve’s plan to raise interest rates next month, according to Mohamed El-Erian, the veteran bond investor.
The chief economic adviser to Allianz, the German insurer, who backed Hillary Clinton to become America’s 45th president, said that if financial markets settle quickly, the Fed would have a “stronger case” to increase rates in December.
Mr Trump’s campaign message that he will spend $1tn on infrastructure to stimulate the US economy and create jobs was one of his few concrete policy plans. Mr El-Erian believes this, coupled with a new era of tax cuts, would trigger inflation and encourage more rate rises.
Mr El-Erian, who chairs President Barack Obama’s global development council, said: “If financial markets avoid unsettling volatility, the Fed would have a stronger case to hike interest rates in December, as an uptick in inflationary expectations accompanies robust labour markets.”
By singling out a public works programme, the president-elect has raised expectations in bond markets of government stimulus that would not only raise debt levels but spur growth and inflation — testing a three-decade rally that drove bond yields to record lows.
Edouard Carmignac, the French investment guru who last month wrote a scathing open letter accusing Mr Trump of running an “unhinged campaign”, agrees with Mr El-Erian that a December rate rise is now more likely.
The founder of Carmignac, the French fund house, said: “This election outcome is much bigger than Donald Trump. It is, to a large extent, the consequence of a wide populist movement that is now pervading the western world.
“It [his victory] will surely raise inflation expectations, worsen fiscal balances and put considerable upward pressure on bond yields. Under these circumstances, market permitting, the Fed will clearly be encouraged further to raise rates in December.”
Immediate market volatility could persuade the Fed to take a more precautionary stance, however. “Much depends on the continuation of Mr Trump’s unifying and constructive pro-growth tone, which he adopted immediately after his victory,” said Mr El-Erian.
Protesters took to the streets in cities across the US on Thursday for a second day of demonstrations against Mr Trump. About 100 protesters marched from the White House, where Mr Trump had his first transition meeting with President Obama, to the Trump International Hotel a few blocks away.
Luke Ellis, chief executive of Man Group, the world’s largest listed hedge fund company, said the political uncertainty makes a December rate rise less likely, but that it is “too early to say decisively”. He said: “It seems most likely that his [Mr Trump’s] policies will be inflationary, so implying higher rates over time, but it would be surprising for the Fed to do anything dramatic before clarity on what the Trump policies actually are.”
He added: “There will no doubt be a great deal of reflection in the coming days on what the result means both for the US and further afield. The work of objectively assessing and acting on the result, regardless of personal views, has already started.”
In its post-meeting statement at the start of the month, the central bank reiterated that the case for a rate rise had “continued to strengthen”, adding that it was now just waiting for further evidence of progress before pulling the trigger. The Fed’s next meeting — its final of the year — is on December 13-14.