central bank of United States of America

Fed Keeping Rate At Zero Till After 2023

That’s at least three more years of interest rates staying in the doldrums here in Singapore, which tracks the US fed funds rate.  In fact, it is likely to go even beyond 2023 as what we have predicted in this blog.  Let me explain.

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US Fed just concluded its 2-day FOMC for September and this time all eyes were on their forward guidance, more specifically their forecast for interest rate in 2023.  This is because previously the Fed has provided guidance up to 2022 which the market knows will be status quo – keeping at zero with no hikes.  Out the 17 Fed governors, only 4 indicated likelihood of a first hike in 2023.  Fed Chair proclaimed this forward guidance as “powerful commitments” sending clear signals to the market that the central bank will hold rates at zero through 2023.

In fact, the Fed now believes its preferred measure of inflation will likely rise up to only 1.20% by end of the year and it does not see inflation rising to 2% until 2023.  Given the Fed’s new policy framework unveiled during its Jackson Hole’s retreat last month where it will now try to achieve an “average inflation” target of 2%, this means that Fed is going to allow inflation to overshoot above 2% for a period even after 2023.  What is unknown is how long this period is going to last which could be years considering inflation has stayed stubbornly below 2% for sustained period of time in the last decade.

Of course, Fed’s policy could change as its always data-driven.  Still, I have serious doubts that inflation is even going to come up much in 2023 as we could yet see another economic downturn after 2021 given the massive asset inflation and the huge debt piling up all over the world.  Let me clarify – this is more my personal opinion.  If you believe in markets resetting itself and getting rid of excesses built up over time.  And because the 2020 recession is more a result of a public health crisis where economies are shut down artificially by governments.  You did not see stock markets crashing to levels you would expect typically during a major downturn and the subsequent price recovery was swift and almost unprecedented.  It’s like the crash never happened at all.  Put it another way, if the virus was to grow weaker and disappears (though we know that’s not happening anytime soon) all of a sudden, the global demand and supply would bounce back fairly quickly though certain new norms of doing business will be entrenched.

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This is why we think interest rates would languish at current levels for a considerable long time. 

The same thing happened in the 6-year period after the financial crisis (2009 to 2014) where prevailing mortgage rates in Singapore were trading 1% range-bound.  Everyone remained on floating rates (at least after a while for some after people realized that rates were just not going anywhere).  What’s clear was not many were keen on fixed rates.  

This time round given the magnitude of the hit and the persistent low-inflation of the past decade, we are expecting the low rates environment to perhaps last beyond 6 years.  And this is once more vindicated by the latest Fed’s statement.

As we have repeatedly warned clients at MortgageWise since the start of 2019 – in a protracted era of low rates, there’s a real risk of locking into a fixed rate mortgage, especially one that’s 5 years which means even higher fixed rate.  Many have learnt that painful lesson at the end of their lockin period, that interest rates never really come up as much as thought.  They have overpaid in interest costs compared to those who opted for floating rates.  

The fear of runaway interest rates is much like a fallacy, in an era of low inflation and low rates which is going to continue.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, seeking to build trust with clients over the longer term rather than product-peddling for quick one-time deals.  So, be it to refinance home loan, buy your next Singapore condo or even review your commercial property loan, speak to our dedicated team of mortgage consultants here for the best Singapore home loan rates.

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