(This article was last updated on 20-Apr-2023)

US Fed officials voted for another quarter point hike, as expected, in its March FOMC. Market is now pricing in likely a final quarter point hike in its upcoming May FOMC on May 3-4 which will bring the fed funds rate above 5 percent for the first time in almost two decades!

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It comes as no surprise Fed will moderate its tone in the last meeting when speaking about the path of rate hikes going forward following turmoil in the banking sector which threatens stability of the financial system.  In fact, Fed chair Jerome Powell made it quite clear then that the collapse of Silicon Valley Bank and Signature Bank were seen as tightening credit conditions and could amount to the same effect of a rate hike.  As such, the Fed has opted to rephrase its language in its statement from “ongoing rate increases” to “some additional policy firming” may be appropriate to attain sufficiently restrictive stance to bring inflation down to the 2 percent target.

The truth is the last FOMC statement is a catch-22 for the Fed.  You can argue that by not doing a 0.25 percent hike, it sends a worrying message that Fed is seeing some very bad things going on behind the scenes in the banking sector that we do not yet see.  Or you can say that by hiking 0.25 percent and staying on course, they’re just going to exacerbate an already tight credit conditions and bring about more chaos.  That’s why you see an initial sell down in the stock market after the Fed meeting.

The bigger picture is this: Either scenario, they are looking more likely than ever to have to give back those rates hikes sooner than expected.  That bolsters our view here that 2023 is going to be a cycle-turning year as Fed gets real close to the terminal rate, pause and perhaps even cut rates.

The next big question will then be – when will they cut rates?  At this moment the futures traders are betting on as many as 4 rate cuts (if each cut is 0.25% percent) for a full percentage point drop from the terminal rate before the end of the year.  But Fed Chair in his press conference says no – that’s not their base case right now which is no cut in 2023, only in 2024.  Who’s right?

After being too slow to hike rates on the “inflation being transitory” call in 2021, then slamming on the brakes hard in 2022 and stepping up hawkish talks at the start of 2023 only to eat their words with two bank failures, will Fed end up being wrong a third time?

I think no one envies the job of U.S. Fed.  In all fairness, Fed is not “wrong” when they give their statements and rate decisions as it’s always based on whatever available incoming data at that point.  Problem is, many a times, the data may be lagging.  Matter-of-factly, the events and outcome prove those decisions to be “behind the curve” and Fed having to react to those events and outcomes.  Still, it’s always easy to criticize “on hindsight”.

After being in the mortgage business since 2014, the bottom line is you can’t read the Fed statements literally.  Fed is data-dependent.  Since data can change suddenly, Fed can also do a 180-degree about-turn in its stance suddenly.  So, if you sign your rights away in a mortgage contract for too long a period and suddenly Fed reverses its stance, how are you going to get out of your contract? 

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After being too slow to hike rates on the “inflation being transitory” call in 2021, then slamming on the brakes hard in 2022 and stepping up hawkish talks at the start of 2023 only to eat their words with two bank failures, will Fed end up being wrong a third time?

Disclaimer: MortgageWise.sg endeavours to bring the best insights and knowledge in our expert domain of mortgage planning to the market.  Still, all viewpoints expressed in our blog remain as opinions of the writer, and shall not be constituted as financial advice.  We cannot be held responsible in any way for any financial losses arising from your mortgage decisions should you choose to rely on any of our viewpoints and opinions.