A growing disconnect between the market and economy

WALL Street is currently being supported by expectations that the US economy is strong and will gain even more strength once the Trump administration unveils its fiscal and spending programmes. So far, there has been no inkling of what these policies might be other than plenty of talk that the tax plan will be "phenomenal" and that lots of US jobs will be created.

Despite an absence of clarity on the fiscal front, the guardians of monetary policy in the US Federal Reserve, like the rest of the market, appear to have bought into the idea that massive tax cuts and spending in a robust economy with full employment will result in inflationary pressure. So it has been that over the past fortnight the Fed has rushed to strongly signal that interest rates will have to be raised very soon, and possibly quickly afterward.

However, because it was only a bit more than two weeks ago that the market thought the probability of a rate hike this week was under 40 per cent versus 100 per cent now, observers have remarked that the Fed is "behind the curve" and will have to scramble to play catch-up.