U.S. federal reserve

A More Dovish Fed Pares Down Hike To 0.25%

In the first FOMC for 2023, a slightly more dovish or neutral-sounding U.S. Fed announces a smaller rate hike of 0.25% which brings the Fed funds rate now to a range of 4.50-4.75%. 

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“we’ve covered lots of ground in the past year”

“we can now say for the time the disinflationary process has started”

“if we do see inflation coming down much more quickly, that will play into our policy setting”

“it is certainly possible Fed funds rate to stay below 5%” 

We scrutinized the Fed chair Jerome Powell’s speech and his subsequent question-and-answer session for tell-tale signs of what’s instore in the next few meetings.  Although the Fed chair still largely maintain that “it is premature to declare victory on inflation” and see “ongoing increases in the target range” as appropriate, that definitive hawkish tone of “doing whatever it takes to bring inflation down” is clearly missing in this statement.

In fact, Powell alluded to the committee discussing at length on “the path forward’ without giving details when asked by one journalist on when Fed might pause.  It will be revealed in Fed minutes three weeks from now.  The fact that Fed did not provide the dot plot projections in this meeting shows there’s active debate going on regarding the terminal rate – the extent and not the pace of rate increases.  This indicates we are near the point of a pause by Fed in the next few meetings.

The biggest takeaway is how Powell explains what the Fed needs to see next which will certainly spell the end of policy tightening – disinflation showing up in the services ex-housing component of Core PCE.

This reinforces our view that inflation data releases will take more centre-stage than Fed meeting in 2023.  We have PCE print out usually towards end of the month and the next CPI print out on 14 Feb which we will be watching closely.

What That Means For Mortgage Interest In Singapore?

man choosing between fixed or floating rate home loan

The 3-month compounded SORA has already hit a resistance somewhere around 3.50% over the last few months.  Daily SORA has tapered off in December but is now back up.  With Fed now going on much smaller increments leading to an imminent pause soon, we expect resistance level for SORA to remain at 3.50-4.00% range-bound.  Those thinking of a runaway inflation and interest rate to hit 6%, 7%, 8% or 10% certainly need to keep their fears in check.  SORA is not even going to reach the same level as Fed funds rate at 5%.

The bigger question now is what happens after the pause which is a tug-of-war between the Fed who says “don’t expect a rate cut in 2023” versus financial markets which are already pricing in two cuts before the end of the year.  Who’s right?

“It’s the Fed that tells the market when to raise rates, but it’s the market that tells the Fed when to cut rates”

— a saying by bond traders as quoted by Mike Santoli,
CNBC Senior Markets Commentator

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