Federal Reserve officials face significant uncertainty following recent political and market developments. In September, the Fed cut rates by 50 basis points, but since then, long-term bond yields have surged by 80 basis points. With an additional 25 basis point rate cut anticipated at the upcoming meeting, the Fed’s plans are complicated by the Republican victory in the U.S. election. This shift signals potential deregulation, increased budget deficits, and generally pro-growth policies, which could amplify U.S. economic activity but may also strain the Fed’s efforts to control inflation and market stability.
The immediate reaction to the election outcome has been an increase in U.S. stock prices and the dollar, while long-dated bonds, gold, energy, and Chinese equities faced sell-offs. The market seems to anticipate that the Republican-led pro-business policies may spur U.S. growth while leaving other economies relatively unaffected. While this optimistic scenario could unfold, several potential obstacles could quickly derail it, posing questions about the Fed’s policy options.
U.S. Treasury Market Risks: A Possible “Liz Truss Moment”
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