Both presidential candidates are not easy to deal with! The Federal Reserve may even be forced to raise interest rates next year?

Mark Dowding, Chief Investment Officer of BlueBay, a top global asset management company under Royal Bank of Canada, stated that given the policy proposals put forward by both US presidential candidates are likely to stimulate inflation, the Federal Reserve may have to raise interest rates next year.

Dowding, who is betting on this, expects the breakeven inflation rate for US bonds (an indicator of inflation expectations) to further expand. He also anticipates that as long-term US Treasury yields rise faster than short-term yields, the US Treasury yield curve will steepen sharply. This is because he believes investors will demand a higher premium to compensate for inflation prospects, especially if Trump wins the upcoming election next month.

Dowding told Bloomberg TV, "I do not rule out the possibility of the Fed cutting rates once or twice again. However, if we do see Trump significantly more inclined towards inflation in policies such as tariffs, immigration restrictions, tightening the labor market, and providing further fiscal stimulus, who can guarantee that we won't be talking about the Fed raising rates instead of cutting them by mid-next year."

After a series of recent data indicating unexpectedly strong US economic performance, traders have significantly reduced expectations of a Fed rate cut, leading to a rebound in inflation expectations. The breakeven inflation rate for US five-year bonds climbed after dropping to the lowest level since 2020 last month.

Breakeven inflation rate for US five-year bonds

In another interview, Dowding mentioned that he buys when the breakeven inflation rate for US five-year bonds is below 2%, and he expects this rate to rise to 2.5% in the coming months. He also believes that the yield spread between US two-year and 30-year bonds could surge from the current 35 basis points to 150 basis points when the "time is right."

Amid concerns about the US fiscal outlook, Republican presidential candidate Trump and Democratic presidential candidate Harris are attracting voters in key battleground states through a series of economic policies, including tax cuts.

Dowding also pointed out that geopolitical tensions will also push up energy prices. Due to heightened tensions over escalated hostile actions in the Middle East, crude oil futures prices have risen by about 7% this month, exacerbating broader inflationary pressures