President Trump could trip up the Federal Reserve

A Trump presidency would likely upset markets and could provide the Fed with another excuse to sit tight on rates.

Republican presidential candidate Donald Trump speaks during a campaign rally in Toledo, Ohio. (AP Photo/Evan Vucci)

A Donald Trump victory in November’s US presidential election is one hurdle to what seems like a certain US Fed rate hike in December.

As expected, the Fed last night sat on its hands leaving short term rates on hold but being more hawkish in its commentary suggesting, assuming the data remains positive, that a 25 point rate hike in December is almost certain.

The latest opinion polls suggest Trump has closed the gap on Hillary Clinton and, albeit unlikely, an election victory would almost certainly upset financial markets on the simple theory of fear of the unknown.

A Clinton victory would be seen as continuing on much the same path as Obama and hence would not worry the market so much.

What the US Federal Reserve does is important in Australia because an expected rate hike would tend to support the US dollar, which would weaken the Australian dollar.

The latest Fed readings show 14 of the 17 regional Feds expect another rate hike.

But the survey also shows only two increases are expected next year.

This means, other things being equal, the Fed would have short-term rates at just one per cent at the end of next year which is hardly a level that should create much fear on global markets.

A move to raise rates is important because it signals the Fed is seeing some growth and strength in the US economy.

This would tend to push bond prices down and yields higher which means, for the first time since the GFC, stocks and bonds would start to show signs of reverting to more normal trading conditions.

This too would be positive for the Australian market.

The US economy has been creating 180,000 jobs a month this year and the unemployment rate is at 4.9 per cent, well down from the 9.8 per cent level during the recession.

Its been a long slow recovery and US inflation remains below the Fed’s target rate of two per cent