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morning business briefing

Briefing highlights

  • Fed poised for first rate hike in a year
  • ‘Twitter Trump’ or ‘presidential Trump’?
  • Investors wait for ‘dot plot’
  • What Trump may signal on Yellen
  • Markets mixed in advance of Fed

Fed poised to hike

Almost one year after its first post-crisis rate hike, the U.S. central bank is likely to do it again.

Everyone expects that.

What they really want to know is what chair Janet Yellen and her Federal Reserve comments make of the incoming U.S. president and his fiscal agenda, and how Donald Trump could react.

Here’s what to watch for later in the day:

Economists and market players expect the central bank to raise the benchmark federal funds rate by one-quarter of a percentage point to a range of 0.5 to 0.75 per cent.

The Fed has signalled this for some time. And economic indicators – for example, the U.S. jobless rate is now down to 4.6 per cent – back this up.

“Indications of above-average growth and tightening labour markets provide conditions consistent with the central bank resuming tightening,” said Royal Bank of Canada assistant chief economist Paul Ferley.

The 2 p.m. ET policy statement will come with new projections from individual Fed officials, on where they see the economy and the Fed funds rate headed. The latter is known as the “dot plot,” and is widely watched for the expected timeline for more rate hikes.

Ms. Yellen will also hold a news conference, where she is certain to be asked what she thinks of Mr. Trump’s fiscal plans.

“With indications that above-average growth is likely to persist over the second half of 2016, attention will be paid to see whether the Fed revises up its growth outlook along with accelerating the pace of fed fund hikes beyond 2016,” Mr. Ferley said.

“Comments by the Fed will be watched closely for any suggested impacts from the incoming Trump administration, particularly with respect to possible fiscal stimulus. The Fed has to date maintained a view of ‘too early to tell.’”

Michael Gregory, Bank of Montreal’s deputy chief economist, expects Ms. Yellen to stress three things, first that this rate increase is not a sign of things to come, and that future policy will depend on the indicators.

“Second, the state of financial conditions matter in the formation of monetary policy (a stronger greenback and higher longer-term bond yields are doing some of the Fed’s tightening work for them),” Mr. Gregory added.

“Third, Fed policy is reactive, not proactive, with respect to fiscal policy prospects. No doubt many of the questions the chair will field will be tied to the market, economic and policy implications of Mr. Trump’s presidential victory and the Republican sweep of Congress. We suspect one key takeaway from all the day’s policy pronouncements will be that we won’t have to wait another year for rate hike 3.”

It could all get “extra lively” because of the Trump factor, said London Capital Group senior market analyst Jasper Lawler.

“This is the first Federal Reserve meeting with Donald Trump as U.S. president-elect,” Mr. Lawler said.

“Trump’s response or lack thereof could exaggerate or curtail the market reaction to the Fed,” he added.

“Traders would be advised to have Trump’s Twitter feed on screen next to their live stream of Janet Yellen. ‘The Donald’ has previously suggested the Fed suppressed interest rates for political reasons; even saying that Janet Yellen should be ‘ashamed of herself’ for doing so. At the same time he has described himself as ‘a low rates guy.’”

What for one of two Mr. Trumps, Mr. Lawler said. There’s the “Twitter Trump’ who “bemoans the rate hike as either timed against his presidency or as ‘too little too late.”

Then there’s the “presidential Trump who respects the Fed’s independence.”

There’s actually more at stake here.

“Silence could imply Donald Trump will endorse Janet Yellen for a second term as Fed chair,” Mr. Lawler said.

“Criticism of Fed policy from The Donald would make a Yellen second term very unlikely. If Yellen stays as Fed chair beyond her current term, which ends in 2018, it would presumably mean a lower path of rates rises than if Trump were to appoint a hawk as her successor. We believe criticism from The Donald would lead to a stronger U.S. dollar and a steeper yield curve.”

‘Trump drunk’

It’s anyone’s guess where we end up on the markets, given the Fed decision, but at this point global stocks are mixed.

Notable, of course, is that the Dow Jones industrial average is making a run at the 20,000 mark.

Tokyo’s Nikkei and Hong Kong’s Hang Seng inched up, while the Shanghai composite lost 0.5 per cent.

In Europe, London’s FTSE 100, Germany’s DAX and the Paris CAC 40 were down by between 0.2 and 0.7 per cent by about 6:05 a.m. ET.

New York futures were little changed.

“U.S. markets once again made record highs yesterday as investors continued to pile in with almost giddy abandon,” said CMC Markets chief analyst Michael Hewson, adding that “you could almost call it getting Trump drunk.”

While investors are awaiting the Fed, we’ll see what the week brings.

“With markets in their current mood it is hard to imagine what could stop the index hitting 20,000 this week,” Mr. Hewson said of the Dow.

How markets closed Tuesday

THE GLOBE AND MAIL » SOURCE: QUANDL