mortgage interest rates going up and down

Deciphering the most likely path of interest rates in 2025

As we start off a new year, it’s good to recap 2024 when financial markets started with a forecast of up to six rate cuts by U.S. Fed but ended with only half that many (albeit it was a full 100 basis points or 1.00% cut).

This year we started with expectation of at most two cuts which has since been whittled down to one in recent weeks, or perhaps none for some.  Question is: will we get another surprise and this time end up with twice as many?

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It only goes to show the uncertain nature of global events and financial markets, which are set to get even more eventful under a Trump 2.0 in the next four years. 

In fact, U.S. President Trump has started his new term demanding that Fed lower interest rates immediately.  It does not mean that Fed, which is apolitical, is going to oblige anytime soon, at least not until the end of current Fed Chair Jerome Powell’s term in May 2026.  Yet, Fed officials are also human and may subliminally be affected by a “boss” who constantly yells repeatedly over their shoulder what to do.

Incidentally, the talk is Trump may even seek to nominate the next Fed Chair this year, months ahead of May 2026, in a bid to weaken the authority of Jerome Powell.  You can certainly expect the next Fed Chair-designate to do his bidding.

Let’s now talk about the most likely path of interest rates in 2025 and beyond.  For that, we need to take a look at the interest rate cycle.

interest rate cycle Singapore 2004 to 2025

First, you will notice that despite all the rhetoric in recent years on how rates will stay “higher for longer” (interestingly that has now morphed into “slower for longer” rate cuts), the interest cycle is showing surprisingly very similar symmetrically patterns.  That’s why it’s called a cycle to start with – human behaviour tend to repeat over long periods.

If that’s your belief, then you’ve got to extrapolate the path of Fed funds rate (black line) as well as 3-month SORA (orange line) all the way down to hit 1% or less for the latter!  That may be too much of a stretch for many, but never say never.

Why was there this long period from 2009 to 2016 where interest rates stay in the doldrums for almost close to a decade?  Obviously, it’s got to do with Fed’s pump priming of the economy by printing money through three massive QEs (Quantitative Easing) which has led to asset bubbles all over the world.

What’s not seen in the chart here is the peculiar case of inflation remaining tepid at sub-2% level for over two decades until its sudden breakout in 2022 as a result of Covid-19 pandemic’s supply chain seizure and the ensuring M2 money supply boost with massive stimulus measures.

Notwithstanding all the talk and fear of Trump’s tariffs being inflationary, I do think the same forces leading to tepid inflation in the period before 2022 are still largely at play today – the advent of internet and e-commerce since late 90s where efficient price competition globally lead to more efficient purchases be it wholesalers or end-consumers.  No doubt, with onshoring, friend-shoring and protectionism rising, which will crimp savings in prices.  However, there’s another force in the making.

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Despite all the rhetoric in recent years on how rates will stay “higher for longer” (interestingly that has now morphed into “slower for longer” rate cuts), the interest cycle is showing surprisingly very similar symmetrically patterns.

(F) homeowner thinking about mortgage interest rate

The strength and exceptionality of the U.S. economy in recent years has confounded many analysts economists alike, especially in the face of one of the fastest monetary tightening cycle on record.  In fact, anyone who has uttered the R word (recession) has been made to look silly and any fund manager who has sat out of the market in the last few years will rue the huge opportunity costs as S&P powered to one record after another.

How do you explain what holds up the U.S. economy so well such that a 4.50% Fed funds rate today no longer seems to be tightening financial conditions enough with corporate America continuing to report profits and unemployment remaining near record lows at the 4 per cent handle?

Many have pointed to the huge productivity gains made in recent years as possibly shedding some light on this conundrum.  If that is true, this means the recent rise of China’s DeepSeek will have huge implications to further perpetuate such productivity gains in the decades ahead, with its proliferation of cheap A.I. implementation across many sectors and economies.

Overall, the forces of A.I. led productivity gains, ecommerce in a still globally-connected world, and the new energy policies of the Trump administration will have largely deflationary effect on prices.  This must be weighed against the widely-believed inflationary policies of tariffs and retaliatory trade wars.

On the contrary, if trade wars lead to declining profits and massive layoffs, prices may go the other way instead of up as consumers pull back on spending. That’s the very reason behind Fed’s three “insurance rate cuts” back in 2019, as preemptive moves against global economic slowdown due to tariffs enacted by Trump in his first term.

In recent years, inflation has also shown to be more elevated in the first half of the year and typically tapers off as the year progresses. We have to see what happens next after the March FOMC.

Coming back to the interest rate cycle, the most likely path of interest rate is still downwards from here as it will be quite far-fetched to imagine a V-shape up against the political will of a U.S. President who wants to beat it down, perhaps all the way down.

To achieve that, the new administration will certainly be mindful not to give inflation any chance of rearing its ugly head.  It has since shown some restraint in not enacting steep tariffs on China, or that which will have long-lasting impact on prices.

To end, after watching how fixed mortgage rates in Singapore almost halved from its peak of 4% at the start of 2023 down to the current 2.50%, we’ll be watching the fall of SORA with greater interest in 2025.  

And the two most probable paths of SORA remain either a gradual descent to 2% level, or a steep crash below that which necessities another financial crisis where Fed is forced to cut fast.  That will be a topic for another day which I need to show some restraint, lest I too appear silly.

On the contrary, if trade wars lead to declining profits and massive layoffs, prices may go the other way instead of up as consumers pull back on spending. That’s the very reason behind Fed’s three “insurance rate cuts” back in 2019, as preemptive moves against global economic slowdown due to tariffs enacted by Trump in his first term.

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