US Fed has hiked the funds rate to a range of between 1.50% and 1.75% in its latest March FOMC but the market heaved a sign of relief as it kept to its forecast of a total of three hikes this year.  It has, however, raised the forecast number of rate hikes in 2019 from two to three.

In the words of the newly-installed Fed Chief Jerome Powell in his first press conference after the meeting, “We’re trying to take that middle ground on rate hikes, boosting rates enough to head off an eventual spike in inflation without derailing the economic expansion.”

This summarizes the position the Fed has taken as it detected no significant pickup in inflation as yet which continues to run at below the Fed’s 2% target and is expected to move closer to the target only sometime in 2019.  It expected core inflation which strips out volatile food and energy prices to move up from 1.5% to 1.9% by end of 2018.

Other noteworthy observations released are as follows:

• In line with its forecast of 3 hikes in 2018 and now also in 2019, the target Fed funds rate will rise to 2.1% and 2.9% by end of 2018 and 2019 respectively.
• It revised GDP growth forecast for this year from 2.5% to 2.7% in apparent recognition of the fiscal tax stimulus passed by Congress late last year. Likewise, it adjusted up the growth forecast for 2019 from 2.1% to 2.4%.
• It cites a brighter economic outlook with the US economy at the healthiest ever since the Great Recession of 2008, although it noted some moderation in both consumer and business spendings from the highs of Q4 2017.
• Still, the Fed noted jobs gain in the market in recent months has been strong as the economy added more than 200,000 jobs in January and a solid 313,000 jobs in February. It now expects unemployment to fall further to 3.8% by end of 2018.
• Fed Chief also commented on the recent tariffs on steel and aluminium imposed by the Trump administration that “There’s no thought (among Fed policymakers) that changing trade policy should have any effect on the current outlook”. However, Powell cautioned that things might be different should the current trade conflict escalates significantly.

Overall, the tone set in this FOMC is that of a more confident Fed with regards to economic expansion in US thanks largely I think to the additional fiscal boost from Trump’s tax cuts.  It also affirmed the pace of rate hikes for 2018 will be unchanged.

At MortgageWise we are keeping to the same forecast of 3 hikes in 2018 for now but I think do not dismiss the possibility of a fourth hike as the tax cuts were just implemented in February and it takes time to filter through the economy with many US corporations still looking at how best to deploy that extra savings.  As I have said before, when labour market tightens further with hiring and retaining of talent coming to the fore, there should be increasing wage pressure which will likely push inflation along at a faster pace.  Inflation has been a conundrum for Fed for many years now and any slight indication of a pickup towards end of the year will push Fed to act more decisively.

Here in Singapore, with the latest hike in the Fed funds rate to 1.50% – 1.75%, SIBOR (3-month) will likely start moving back up to the 1.50% range over the next few months as there is a strong correlation between the two.  Already it has started moving from 1.12% to 1.37% last month in the run-up to this FOMC.

What this means is that cost of funds is going up across the board for lenders and borrowers.  And it will be even more costly to offer fixed rate mortgages.  Will prevailing fixed rates finally rise beyond 2% by middle of the year?  This is a very likely scenario.  Back in 2016 after US Fed’s first historical hike in Dec 2015, the market got into a bit of frenzy as fixed rates started shooting above 2% for a brief few months before a sudden reversal in 3-month SIBOR from 1.25% back to 0.87% sent fixed rates tumbling down again. Back then the softness in interbank market is caused by a sluggish Singapore economy being hit by a meltdown in oil & gas sector leaving the banks stashed with too much funds to lend out.  And the other biggest difference between the 2016’s spike in rates and the current one is this – US Fed did not hike rates anymore for the next 3 quarters until 2016 Dec FOMC, leaving the funds rate at near 0.25%-0.50% for the whole of 2016.  This time round, Fed has moved up significantly four more times in Mar 2017, Sep 2017, Dec 2017 and the latest Mar 2018 with funds rate rising from 0.50% to 1.75%!

That is why lenders across-the-board have acted decisively to hike FDR pegs last month.  We do not see how a reversal in rates could repeat itself like in 2016.  And if we are right in our analysis, then this could really spell the end of an era of sub-2% fixed rates, possibly by middle of the year.  So, for those with renewals (of mortgages) coming up soon, do quickly contact our consultants while we can still offer you 3-year fixed rate Singapore home loans at 1.80%, 1.80%, 1.85%!

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there.