Donald Trump’s election victory has raised the prospect of a major fiscal stimulus next year, at a time when the economy is already close to full employment. The subsequent surge in Treasury yields and the dollar illustrates that markets think that a combination of faster real economic growth and inflation will force the Fed to raise interest rates a little more aggressively than previously anticipated. We now expect GDP growth to accelerate to 2.75% next year, with CPI inflation climbing toward 3%. As a result, we expect the Fed to hike the fed funds target range to between 1.50% and 1.75% by end-2017.
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