central bank of United States of America

All Eyes On FOMC Dec 2016

In its latest September FOMC decision just out, Janet Yellen and company have voted to leave rates unchanged (at 0.25% to 0.50% range) and that effectively pushed the much-awaited 2ndrate hike decision to after the US Presidential Election – in December’s FOMC. In fact the Fed chair cannot be any more clearer by hinting that “one rate hike would be appropriate for 2016”. If indeed that happens, then it would have come exactly a year after it moved to hike rate for the very first time in a decade last December.

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The general assessment by US Fed this time is that labour market conditions in US continues to improve and the case for a rate hike has strengthened albeit they will rather take a more cautious approach and wait for more data pointing to the economy heading towards full employment and inflation moving closer to its 2% target. Inflation has remained low due largely to decline in energy prices in the past year and that of non-energy imports. They now expect it to rise to 2% over the medium term. The Fed maintained its forecast for US economy to grow by 2% in 2017 and 2018 but dropped that for this year from 2% to 1.8%. It has also dropped its forecast of where the funds rate will end up by end of 2017 and 2018, by half a percentage points.

The latest US Fed announcement seems to be very much a non-event, already priced in by the market in its run-up to September. There is simply no reason for US Fed to “shock” the market with a rate hike against what the financial markets are expecting at this point, and well before the outcome of the GOP election is known.

Here at MortgageWise, we have temporarily stopped (since June) giving our take on where we see 3-month SIBOR heading in Singapore by end of the year. We think many uncertainties still prevail in the global markets from events taking place in US and Europe over the next few months. In fact these events might play out even longer. The only good news is that China is showing more signs of its economy stabilizing of late.

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Overall US Fed is taking more cautious approach this year after another year of economic start-stops. Contrast that with the committee’s overly-hawkish stance back in December 2015 when they were projecting four rounds of rate hike in 2016, or 0.25% hike per quarter. As the world battles with anaemic growth going into 2017, and with the other half of the world’s central banks still mire in negative interest rates, it is reasonable to conclude that rate hikes will continue to be at snail pace if it happens.  OECD calls it a “low-growth trap” in its latest report which forecasts lower GDP growth for most of the economies in the world in 2017  from US (2.1%), Euro (1.4%), Japan (0.7%) and China (6.2%).

We have re-iterated time and again in this blog, and we will continue to keep watch to this end, that the only figure we will focus on is inflation in the US – what that really matters to the US Fed right now since the economy is by and large in full employment. And the only reason why that has not crept up as quickly as what the Fed had expected is ironically the strength of the dollar leading to price declines of imports, as well as oil prices, with the latter being another good indicator to watch.

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For now against the backdrop of uncertainties in the next few months, we maintained our view that the best position to take is to stay nimble and be ready to respond the moment things clear up, which might take one to two years. And with fixed rates just about 30 basis points above prevailing floating rate packages, for those who rather have peace of mind on a fixed monthly repayment, it may be wise to go for a 2-year fixed rate at 1.60-1.65% at the moment, nothing longer than that. And for those with bigger loans and who like to benefit from the current low rates in the 1.30% range, we say take a bet on floating rate packages be it on SIBOR or DMR (Deposit Mortgage Rate) but make sure you are not locked in, or at least not more than a year which will be around the time the direction of rate movements become clearer.

At MortgageWise.sg, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of home loan products for banks and financial institutions in Singapore.

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