Markets may be guilty of gambler’s fallacy on US rate increases
Traders, lulled by a record of the Federal Reserve proving less hawkish than expected, may find that things change over the coming year
Sydney/Beijing — When successive coin flips turn up heads, a gambler’s instinct would dictate the next toss results in tails — even if the odds are still 50-50. That is the so-called gambler’s fallacy, and financial markets are at risk of making the same mistake of emphasising past precedent when it comes to Federal Reserve interest-rate increases, some investors warn. While traders have been lulled by a record of the Fed proving less hawkish than expected, things could change over the coming year. The scenario some are eyeing: the Trump administration’s coming fiscal stimulus spurs a rapid pick-up in inflation, given the lack of slack in the US economy, with unemployment historically low. Fed chair Janet Yellen, who has overseen just two rate rises since taking the helm three years ago, then might need to move faster, triggering a surge in the dollar. "Trump will be inflationary," Vimal Gor, head of income and fixed interest at BT Investment Management, which has about $67bn under ...
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