Any lingering doubts that the US Federal Reserve will raise interest rates next month have been blown away, with the minutes from the central bank's last policy meeting showing a solid majority are in favour of moving "relatively soon".
According to minutes of the Fed's November meeting released overnight, Fed officials were optimistic that the US economy would continue to steadily strengthen, even before Donald Trump's surprise electoral victory raised the prospect of major fiscal stimulus through large tax cuts and a big boost in military and infrastructure spending.
As a result, "most participants expressed a view that it could well become appropriate to raise the target range for the federal funds rate relatively soon".
Expectations that the Fed will hike rates in December – the first since it raised rates for the first time in almost a decade at the end of last year – have soared since Trump's victory.
Even before the Fed's minutes were released, investors believed there was a 98 per cent chance of a December rate hike.
The Fed's minutes came as a vicious sell-off again swept through global bond markets, as investors wagered that Trump's victory marked the end of the 35-year bond market rally that saw global bond yields crushed to historic lows mid-year (yields fall as bond prices rise).
Yields on benchmark US 10-year bonds climbed to 2.37 per cent, while the yield on the 10-year German bund – which fell into negative territory mid-year – is now back to 0.255 per cent.
Bonds under intense selling pressure
The bond market has seen intense selling pressure since Trump's victory as investors worry that his plans will result in gaping budget deficits, that will result in higher inflation and in more government bonds being issued – both of which are negative for bond prices.
Investors believe that Trump's victory will also weaken the position of the hardline rump of Fed officials who remain obdurately opposed to a rate hike.
According to the November minutes, these policymakers argued that it was premature to raise US rates given there is continuing slack in US labour markets, and inflation remains below the Fed's 2 per cent target.
They noted that it was far easier to raise interest rates if US growth proved stronger than expected, than to cut rates if the US economy stumbled, especially given that the Fed's key interest rate is already so low – the target range is 0.25 to 0.5 per cent.
They pointed to mounting risks to the global economy, "including constraints on monetary policies in the low interest rate environments of some countries; investors' concerns about developments potentially affecting profitability in the European banking sector; the possible consequences of upcoming negotiations and eventual terms of Britain's exit from the EU; potential deleterious effects from rapid credit growth in China; and the potential for further dollar appreciation, which could restrain US inflation for a considerable time".
But even though these are very legitimate concerns that might have provided an excuse for inaction in the past, Fed policymakers have no choice but to ignore them and push ahead with a December rate hike.
The market mood has now switched decisively, and just as the President-elect has championed "America first" economic policies, so the US central bank will become more inward looking when it comes to setting monetary policy.
The irony is, of course, that this ignores that rising US interest rates and a stronger US dollar inevitably reverberate through the global economy, causing a painful tightening in global financial conditions.
And the US will inevitably be affected if this tightening triggers a severe slow-down in emerging markets.
Warning signs emerge
Warning signs are already emerging. Rising US interest rates following Trump's victory have bolstered the US dollar, pushing it to a fresh 13-year high overnight.
But the stronger greenback has worrying weakness in the Chinese yuan, which is now moving dangerously close to the landmark level of 7 yuan to the US dollar.
The yuan's steep fall is intensifying capital flows out of China, as individuals and companies try to preserve the value of their capital, but this capital flight is only exacerbating the downward pressure on the Chinese currency.
As a result, the People's Bank of China has been forced to intervene to prop up the value of its currency by running down its foreign currency reserves – which are heavily invested in US government bonds. (Indeed, it's likely that this is adding to the selling pressure in US bond markets.)
Sharp falls in the Chinese currency have rattled global financial markets twice in the past 18 months – in August 2015 when Beijing announced a shock devaluation of its currency, and again earlier this year when traders worried about huge capital outflows from the country.
Investors fear that global markets could once again become spooked if Beijing is unable to curb the decline in its currency in the face of an implacable US dollar resurgence.
