Don’t Fight The Fed!

True to expectation, U.S. Federal Reserve just unleashed its second consecutive 0.75% hike to bring its federal funds rate close to 2.50%, hitting the last peak set in Dec 2018.

This 75 basis points hike has largely been baked in.  What the market is watching out for is Fed’s forward guidance on what’s to come. And that guidance seems to point to a slowdown soon in its pace of rate hikes before the end of the year.  Fed Chair Powell alluded to that when he said “It likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation”.

The stock market of course cheered on news of that, forgetting that it does not mean no further hikes, just smaller hikes.  Everything depends on incoming data.  But it does show that it’s in the central bank’s plan to get its funds rate up to a certain level quickly and then start to pause or go slow as the full effects of policy tightening trickle down to the real economy. Still, Fed funds rate is looking to surpass the most recent peak to hit 3.00% as the market is now pricing in at least another 0.50% hike in September

At MortgageWise.sg, we watch Fed moves closely.  It’s the single largest determinant of interest rate direction here in Singapore affecting mortgage costs.  But there’s another important reason to watch Fed moves – for all your investments.  You probably heard the phrase “don’t fight the Fed”.  Had you detected Fed’s pivot to a hawkish stance since end of 2021 (after Powell’s re-appointment for a second term) like we did, which was further validated by a lift-off in rates at 0.25% in March, you would have liquidated most of your investments to hold cash before all the recent bear market rout.  In other words, working with the right mortgage broker goes beyond just mortgage planning – it can pay great dividends when you manage to “stay ahead of the curve”.

That’s what we aim to do here for all clients who choose to work with us and who look past immediate gains promised by our competitors, even direct-to-bank rates as we will save them more over the longer term.  How do we do that?

What Does That Mean For Interest Rate In Singapore?

We do that by sticking our neck out with our forecasts.  It’s tricky business to forecast but that’s how we add the most value to clients beyond just comparing mortgage packages which all brokers do.

We noticed there’s a fair bit of fearmongering in recent media interviews with analysts and brokers, whatever the agenda may be.  Against this backdrop, we like to be a voice of calm and offer a more contrarian viewpoint – hold your nerves even as Fed continues with its hike.  Do not panic.  What goes up must come down at some point.  The question is how long will it take?

Let us point out the one biggest thing that most people miss so far and what we kept saying in this blog – this is the fastest tightening cycle by the Fed which has enacted total of 200 basis point increase, what which will normally take them two years, in over 3 short months.  What this also means is that the tightening cycle will peak sooner than you think, and we put that by mid-2023 or earlier, when the Fed is going at such furious pace.  And so far, the interest rate cycle is telling us that fed funds has never failed to roll over after a pause at the top.  If that’s true again, most people might find themselves trapped with a higher rate than they like all the way until end-2024.  So, the key here is – do not be locked in for too long in such uncertain times.

Against this backdrop, we like to be a voice of calm and offer a more contrarian viewpoint – hold your nerves even as Fed continues in its hike.  Do not panic.  What goes up must come down at some point.  The question is how long will it take?

After a brief pause in June, we do have some idea on how we think rates will play out from here but we do need a few more months of U.S. inflation data to confirm the trend.  Fed in its latest statement pointed to “recent indicators on spending and production have softened”.  Demand destruction is slowly but surely happening.  So, even for mortgage planning, we say “don’t fight the Fed”.  Don’t doubt or underestimate the impact of Fed’s tightening to cool demand and bring inflation under control, notwithstanding supply side constraints. 

The question to ask is how high is the terminal rate (end-point) for the funds rate, and the ensuing level for 3M SORA here in Singapore, before the Fed is convinced that inflation is on a sustained path down toward its 2% target?  For that and more detailed analysis, speak to our team of consultants here.

Compare Singapore home loan rates quick, fuss-free and reliably at MortgageWise.sg. If you have benefited from deep insights in our blog, imagine how much more you’ll save from our expert view-points & forecasts which you do not get from anywhere else. We help you to navigate interest rate cycle astutely be it for residential or commercial property loan. Work with us today and help support our social cause too!

So, even for mortgage planning, we say “don’t fight the Fed”.  Don’t doubt or underestimate the impact of Fed’s tightening to cool demand and bring inflation under control, notwithstanding supply side constraints.