In a widely-anticipated move by the market in recent weeks, US Federal Reserve hikes its federal funds rate to a range between 0.75% and 1.0% following its latest FOMC (Federal Open Market Committee) meeting this month. This amounts to a total hike of 75 basis points over the last 15 months since that historical first rate hike in a decade back in December 2015 when the funds rate hovered below 0.25% range.
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In fact, it is noteworthy that in the run-up to March FOMC, various Fed officials including Janet Yellen and her vice-chair have propped up the market’s expectation for a hike this month by their more hawkish tone, leading to rising odds of a rate hike from a low 30% at beginning of the year to almost 90% in the final week, going by the fed funds future.
Although this is likely a result of a surprisingly strong jobs market data in the first two months of 2017, aided by an unusually warmer winter this year, I read this maneuvering by US Fed as a “pre-emptive” strike. We have earlier given our forecast for the year of two rate hikes in 2017, probably in the 2ndhalf of the year taking our 3-month SIBOR here to a range near 1.50% by December. Our view is that Fed needs to hike quickly in order to give itself leverage to reverse its course should economic growth stalled along the way. The slightly warmer winter in Northern hemisphere come somewhat unexpected this year leading to strong enough jobs numbers for Fed to make this pre-emptive move. Hence its propaganda to “talk up” the market for a rate hike before the FOMC.
Having done so, I now expect that Fed to leave the benchmark rate unchanged for a while for the next six months as it needs more evidence on the health of the American economy and more importantly they are looking for “hard evidence”, in Janet Yellen’s words, of fiscal stimulus measures from the Trump administration. I expect to see more details on that only in the 2ndhalf of the year. So with a “pre-emptive” strike already in place so that the Fed is “not too far behind the curve”, we predict the next rate hike for funds rate to go above 1% to be in September FOMC. Looks like we may still be on track for our prediction of two hikes in 2017 though we were caught out by this pre-emptive move in the 1sthalf of the year.
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Here’s a summary of the key announcements from March FOMC:
- Fed forecasts another two more rate hikes this year, keeping to its forecast of 3 hikes in each of 2017, 2018 and 2019 until the funds rate hit its long-run level of 3%.
- They maintain GDP growth to be at 2.1% for 2017 but raise that slightly from the previous 2% to 2.1% for 2018.
- Unemployment rate will fall from the current 4.7% to 4.5% by end of the year and stay at that level (full employment) till 2019.
- Fed acknowledged inflation has strengthened in recent quarters. Headline inflation, at 1.9%, is now near Fed’s target of 2%, albeit its preferred measure of core inflation which strips out food and volatile energy costs is still at 1.7%. Fed expects the still-low interest rate environment to support core inflation in a slow rise to its target of 2% and stay at that level.
- It also noted a firmer business investment and household spending continuing to rise moderately.
On the whole it is an encouraging picture on the health of the US economy against a backdrop of a gradually-stabilizing global economy with fading risks of Chinese market stagnation, Brexit shock, oil price crash etc. Still we think there are destabilizing events for 2017 that will determine if we do have that final and third rate hike for 2017 in Dec FOMC.
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Coming back to Singapore, what is the implication for homeowners and investors?
First all eyes will be on the benchmark interest rate of 3-month SIBOR and how fast will that rise up as it has a close correlation with the fed funds rate. When SIBOR rises, you can expect banks here to raise all prevailing mortgage loan pegs at some point be it BOARD or even DMR (deposit mortgage rate) which has commanded lion’s share of the mortgage market in the last 3 years now that five banks have launched their own DMR mortgages. To profit from such DMR loans, lenders will definitely need to raise their DMR in tandem with a rising SIBOR, in order to increase their NIM (net interest income). The question is will they all rise at the same time or by the same amount? That is what we will be watching and tracking closely here at MortgageWise, where you get timely reminders as our client.
We had expected local banks to respond within weeks of the last rate hike in December last year. That did not happen. We see that as a good thing which also proved our point that lenders will be very wary of making any hikes on DMR which is a singular and very transparent loan peg unlike BOARD, notwithstanding both being controlled by lenders. Banks need to calibrate their moves very carefully to avoid potential backlash from existing clientele base. However with this 2ndrate hike by US Fed in the space of 3 months, we now expect some banks to finally make their move on deposit rates possibly within a month or latest before the end of Q2? Particularly so if SIBOR creeps up further from its current levels. Another reason for that – any further delay will leave them with less than half the financial year to reap the benefits of a higher interest margin.
With our forecast of two rate hikes in US in 2017 (which by the way is less aggressive than US Fed’s), we are expecting one hike in local DMR rates, bearing in mind the price competition amongst lenders for market share. And we think SIBOR will stabilised after rising slightly this year; the path is still going to be gentle. But with fixed rate mortgages now still hovering below 2%, it may be a good time to review your current mortgage interest, especially if you are out of any lock-in period.
At MortgageWise, 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 and the creditable distributor of mortgage products for banks and financial institutions in Singapore.