US Election: Don’t Forget the Fed

Paul DeNoon

Given all the noise around the election, I think investors for the time being may have taken their eye off the Fed.

Paul DeNoon

There’s ample evidence for the Fed to begin to raise interest rates in December. We’re at or below full employment. We’ve seen some uptick in wage growth, so a normalization of interest rates makes sense. Can the Fed begin to raise interest rates independently while the rest of the world isn’t? I’d say, yes. But, I think what’s happening in the rest of the globe means that they will go at a much more moderate and slow pace.

Doug Peebles

The other factor that is involved in the Fed tightening policy is how the dollar reacts. And so, the notion of, if we get a Trump victory, the dollar sells off. I think it’s going to be more likely that the Fed moves towards raising interest rates and that could be the situation where they actually raise it a little bit faster than the market believes. But again, this trade off of Fed policy in terms of [its]interest rates and the currencies is going to be something that’s very important for all of us to watch.

Paul DeNoon

Yeah, the Fed policy and the reaction across the globe will be interesting. I think the strength of the dollar after the Fed interest rates, the dollar will strengthen; it’s not clear to me, at this point, how much it strengthens from here on a trade-weighted basis.

Doug Peebles

Well, I think again when we look back at the UK, UK runs about a 5% of GDP current account deficit. Which really gave no immediate floor to the British pound. US runs also a large trade deficit, not to that same extent as a percentage of GDP, but it does leave the dollar vulnerable to that quick reaction of the markets when they don’t like what’s going on; and if the US runs a big trade deficit, then the natural movement for the dollar would be to weaken in a period of uncertainty, particularly surrounding the US election.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.