Wall Street & us fed

Era Of Cheap Money Coming To An End

Once again we take pride in correctly predicting in this blog back in October that the liftoff will more likely take place in December rather than 2016 (just like how we have also correctly advised our clients some who are still paying 1.25-1.35% p.a. interest today and perhaps for another 1 year!).

Finally after more than a year of roller-coasting on the timing of liftoff, US Fed has now unanimously voted in a historical move to raise its Federal Funds rate target range by 25 basis points to around 0.40% p.a. following its latest FOMC (Federal Open Market Committee) meeting this month.  This marks the end of an era of cheap money which has inflated stock markets globally since the Great Recession of 2008.

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The stock market immediately vindicated the move with DOW rising by 224 points to end at 17,749.  Indeed there is growing voices that the liftoff is necessary to help bring certainty to financial markets worldwide already rattled by plunging oil prices and slowing down of Chinese economy in the past year.

More importantly Janet Yellen indicated that the pace of future rate hikes will be gradual and measured.

  • The committee felt that the twin conditions to justify the liftoff have been met – improvements in labour market will continue in 2016 and confidence that inflation will start to move soonwith a target of 2%.
  • The pace of future rate increases will be gradual as the central bank’s monetary policy will still remain accommodative to growth.
  • Fed officials this time forecast an even slower pace of growth in rates than in previous FOMC – that federal funds rate will hit only 1.4% by end of 2016 and 2.4% by end 2017, and finally still slightly below the historical long-run average of 3.5% by end 2018. This is about twice longer the usual time it takes for Fed to hike rates to cool an overheating economy during the last three recoveries.
  • In a move of confidence, the Fed also upgraded its forecast for GDP growth for 2016 to 2.4% with unemployment to come down further to 4.7%. It also observed the “labour market slack” (part-timers unable to find full time employment) has diminished since early in the year.  It expects inflation to rise up to 1.6% in 2016.
  • Fed expect energy prices and the dollar to stabilize after the recent stock market rout in summer as China’s economic troubles eased somewhat without spreading over to other emerging economies and the US job market rebounded strongly in the months of October and November.

Taken together these are positive comments which clearly indicates that – the central bank sees economic recovery in US firmly in place now with momentum unlikely to be disrupted; the key concern being inflation which they have struggled to explain for longest time why it has languished in sub-1% territory if recovery is indeed on track.  However now they believe it will rise to near 1.6% by end of next year.

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With OPEC determined to keep oil prices low in a bid to bankrupt competition from shale oil exports coupled with demographic changes in US, we see inflation rising slowly and hence rate increases will most likely be slow in US and the same for Singapore going into 2016.  Locally some analysts have predicted 3-month Sibor to hit 2% by end-2016.  We think a 1.5% target is more likely by 2H of 2016.

That would mean prevailing mortgage floating rates in Singapore to go up to 2.5-2.8% rate with fixed rates possibly hitting 3% p.a. by end 2016, or a year from now.

It may be an opportune time now for borrowers to take action during this festive lull period before banks start tweaking their packages and rates upwards when senior management return to work in January 2016.  Work with professional mortgage distributors and consultants who can better advise you on rate movements and how early you should start planning for refinancing.  When it comes to managing personal costs of funds, take a pro-active approach and do not leave it to chance or respond only when you receive a notice from the bank saying your monthly repayment will go up by next month – it will be too late!

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 in Singapore and the creditable distributor of mortgage products for Singapore banks and financial institutions.

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