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2016-11-15 12:44:38
Nov 14th 2016, 17:38 by R.A. | WASHINGTON
IT HAS not yet been a week since Americans elected Donald Trump their next president, and already there is a lot to digest. While Mr Trump's initial personnel decisions deserve plenty of scrutiny, the global market reaction to the election also demands attention.
This morning, the decline in bond prices that began last week continued. In America, the 10-year government bond yield rose above 2.26%, the highest level since the end of 2015, while the 30-year bond yield reached 3%. Treasuries are faring worse than many other bonds, however. Yields are going up nearly everywhere, but emerging markets and the euro-area periphery are experiencing especially large moves. (It is, as my colleague Buttonwood quipped on Twitter, a "Trump tantrum".) What is happening here, and why?
The conventional wisdom is that markets are pricing in an expected move toward expansionary policy in America. Mr Trump is expected to cut taxes dramatically, increasing the American budget deficit, while also spending more on infrastructure and defence. That boost is coming at a time when America's economy, while still operating short of potential, is nonetheless humming along as close to capacity as it has been in a decade. Unsurprisingly, inflation expectations are rising.
One important question which needs answering is: through what channel are these expected shifts affecting markets more broadly? It is possible that markets reckon American reflation will boost global demand, leading to higher expectations for demand growth and inflation elsewhere. It is hard to be too confident in this story, however. Equities around the world are up a little since election day, but not wildly so. And while some commodities have done relatively well in recent days, like copper, most have slumped.
While Mr Trump's plans might deliver an inflationary impulse, there is another force at work, the effects of which could swamp any American fiscal stimulus. The Federal Reserve, while it remains independent, is not going to tolerate a big rise in inflation. Markets are revising upward their expectations for rate increases over the next 18 months; at the moment they reckon that the fed funds rate will be 50 basis points higher than it currently is by the middle of 2017. A faster-than-expected pace of tightening in America typically sends shockwaves around the world economy. And indeed, the dollar is on a tear.
At several points over the last few years, economists have found themselves worrying that monetary tightening in America and a rising dollar, coupled with a slowdown in trade growth and flat to falling commodity prices, could generate serious financial difficulties for emerging markets with lots of foreign-currency debt (public or private). The Fed has found itself forced to tighten more slowly than it would have preferred as market jitters threatened to feedback into the American economy, slowing its recovery. But a blowout stimulus push by Mr Trump could change this dynamic, leaving a Fed which remains determined not to tolerate much of an inflation overshoot with little choice but to raise rates multiple times. That, more than a turn toward protectionism, could pose a serious short-term threat to economies around the world.