Summary:

Market expectations for future Fed Funds target rates moved higher on the day of and after the US presidential election. More participants now expect the Fed Funds target rate to exceed 4.25% after the Federal Open Market Committee (FOMC) meeting next January, with the likelihood of it falling below that level shrinking by more than 16 percentage points. With that changing expectations, Asian currencies depreciated. 

This upward shift immediately after the US election has been attributed to anticipated higher inflation, according to various media sources. Higher inflation could result from stronger growth fueled by lower taxes, increased costs due to levies on foreign goods, and a reduced labor supply following mass deportations of undocumented immigrants.

Highlights:

1. Just before the US presidential election on November 4, the market anticipated a likelihood of over 44 percentage points that the Fed Funds target rate would fall in the range of 4% to 4.25% next January after the FOMC meeting.

2. However, the anticipated likelihood of the rate to be between 4% and 4.25% dropped to just below 24 percentage points on the day Donald Trump won the election, November 6.

3. Meanwhile, the anticipated likelihood of a higher rate between 4.5% to 4.75% jumped from over 8 percentage points to almost 18 percentage points.

4. Asian currencies depreciated on the back of anticipated higher inflation and US interest rate, along with a stronger dollar. The Singaporean dollar experienced the largest drop in value on the day the election results were released (Nov 6) compared to before the election (Nov 4).

5. The upward shift in expectations for the future Fed Funds target rate reflects market anticipation of a hotter economy and higher inflation driven by lower taxes, a reduced labor supply due to the deportation of undocumented immigrants, and higher costs if across-the-board tariffs are imposed on foreign goods.

Article By LIU, Jingting

Graphic By BALAJI, Akshaya