It’s official now.  Fed has gone big with 50 basis points cut (0.50 per cent) to mark the start of the monetary easing cycle in its latest September FOMC, bringing the fed funds rate down to a range of between 4.75 and 5 percent.

In its summary of economic projections (SEP), Fed officials now pencilled in estimates of a total of 100 basis points cuts by the end of 2024 and another 100 basis points cuts in 2025, to bring fed funds down to 3.4 per cent.

This suggests that the base case, as the Fed sees it now, is for another two more 0.25 per cent cuts in the last two FOMC meetings for the year in November and December. 

It was not a real surprise to many as there were strong expectations by the market for an up-sized move given weakening labour market data of late, as well as more pre-emptive moves by the Fed in view of the long interval to the next FOMC meeting in November.

In its assessment, Fed Chair Jerome Powell remarked that the time has come for Fed to recalibrate interest rate policy given how the balance of risks has shifted more to jobs market with the committee now confident of inflation moving sustainably down to their 2 per cent target.

He suggested that the market should not assume the big move as the new pace of the easing going forward, but instead, read that as a sign of Fed’s strong commitment to achieving a soft landing for the economy.

In a more significant remark, Fed Chair does not think we are going back to the era of low interest rates.  “Intuitively, most — many, many people anyway — would say we are probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates, long-term bonds trading at negative rates.  My own sense is that we are not going back to that,” he said.

Implication on mortgage rates in Singapore

Here in Singapore, the thing we’re watching is not so much how low fixed mortgage rates will go, but how fast SORA will fall off a cliff from its current levels of 3.50 per cent.

As far as we are concerned, fixed rates have declined quite significantly over the past year and the magnitude of drop going forward will depend on how low SORA gets to.

Speak to us for our forecast of how low we see SORA ending the year at. We do see it breaking below the psychological 3 per cent level soon. The bigger question is whether it goes below the next psychological level of 2 per cent.

Homeowners who like to move to floating home loan rates for the next few years may want to capitalise on the ultra-low spreads for SORA packages at the moment albeit that still require quite a significant bet on a fast-collapsing rate environment which does not look like the base case now.

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