US fed and Wall Street

All Eyes On US Economic Data For June & July

In this blog we do regular takes on interest rate outlook coming out from the US, which is a pre-cursor to movements in sibor in Singapore’s context.

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By now most of you would have read what Janet Yellen outlined in her news conference last week.  Here’s a quick summary of the key points in that speech.

  • Fed did not indicate precisely when will be the exact point of 1stinterest rate hike in September or December but re-iterated that the precise timing hinges on the economy’s performance in the coming months. In fact Janet said “it would be wrong if we were to provide you with a roadmap”.
  • Fed policymakers now forecast the federal funds rate to rise from the current 0.125% to 0.625% by end-2015, in keeping with their medium forecast back in March FOMC meeting.
  • However in the group of 17 policymakers, we have now 7 instead of previously 3, expecting no more than 1 rate hike this year. Which also means 2/3 of the group is open to possibly 2 hikes to reach 0.625% with the last one coming in December.
  • Fed also lowered its expectation of the pace of rate increase with new lower forecasts for federal funds rate to hit only 1.625% by end-2016 instead of the previous 1.875%. The same applies to forecast for end-2017 adjusted downwards from 3.125% down to 2.875%.  This suggests the committee see a more gradual pace of increase going forward than in March.
  • In terms of economic data, the central bank lowers the GDP growth rate for 2015 from the previous projection of 2.3% – 2.7% to 1.8% – 2%.
  • It added that job gains have picked up while housing spending has been moderate and the laggard sector of housing has shown some signs of improvement. Also the apparent pockets of weakness in the labor market such as the large ranks of long-term unemployed and involuntary part-time workers have “diminished somewhat”.
  • In terms of inflation using Fed’s preferred definition which excludes food and energy costs, it will be little changed at year-end rising 1.3% to 1.4% on an annualized basis. But this pace is expected to pick up to 1.6% to 1.9% by 2016 which is slightly faster than what it previously forecast.
  • There are also signs that inflation could soon be on its way up with the greenback stabilizing and oil prices on its way up, both factors that helped to keep inflation in check in the past few months. This would then give Fed the much-needed mandate to raise rates.
  • It projects unemployment rate now at 5.5% to dip to 5.2-5.3% by end of the year and to further stabilize at 5% by end of 2016.

Overall given the tonality and language in June’s FOMC statement, my impression is that Fed is still pretty much mincing its word and taking a non-committal stance to rate hike albeit it sounds more optimistic than before.  This is understandable given the delicacy and fragility of the US recovery path to-date.  I am still very much of the view nothing much said so far can been conclusive, not until we see the data coming out for June and July as summer goes into full swings.

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Then there is the Grexit factor which the whole world is watching including the US, to see how big the likely repercussions to global financial markets should Greece be forced to exit EU.  I do think that the effects will be very much contained within Europe.

It is still hugely going to be about the data for June and July which will prove crucial.  Expect rate hike to take off in September, and possibly earlier which will not surprise me, but the consensus is for it to happen in FOMC’s next big meeting scheduled with a press conference in September.

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