The most significant outcome from a keenly-watched U.S. Fed’s Dec FOMC is that the 18 Fed officials were almost unanimous in their “dot plots” for rate hikes in 2022, with almost two-thirds of the committee signalling 3 hikes.

With faster tapering and winding down of asset purchases by Q1 2022 now, what this means is that the first post-pandemic rate hike could come as early as March FOMC the moment Q.E. (quantitative easing) ends, or not later Jun FOMC.  To be followed by 2 more hikes in the 2H of 2022.

What about emergence of an omicron wave?  While Chairman Powell admitted covid omicron variant pose a risk to the economy, it does not impact the central bank’s plans to accelerate its tapering of pandemic-era aid.  What this essentially means is that the Fed sees an urgent need to get Q.E. over and done with as soon as possible, in order to be in a position to hike fed funds rate should the need arises with more incoming data in 2022.  Notwithstanding another wave of omicron hitting U.S., Fed will see to it that bond purchases end most likely by March 2022 now, and not the earlier June timeline.  This is in line with what we saw in our last Fed meeting report back in September where we indicated the lift-off (in interest rates) could come as early as June 2022.

This FOMC has been closely watched as it is the first FOMC where Fed Chair Powell has been forced to shift gears and drop the term “transitory” on inflation, a move he has pre-empted in his congressional hearing earlier in the month. I believe mounting political pressure after his re-appointment as Fed Chair for another term has a part to play in that.  Supply-chain bottlenecks and wage inflation due to labour shortages have contributed to sustaining high prices which does not seem to abate even after more than a year.  To a large extent, the pace of rate hikes in 2022 will depend on how much longer is inflation “transitory” (most expect it to last until the end of 2022), and to what extend an imminent omicron wave will sap demand.

There could yet be surprises.   One thing we know over the years – the path of rate hikes is never linear but full of twists and turns.

To a large extent, the pace of rate hikes in 2022 will depend on how much longer is inflation “transitory” (most expect it to last until the end of 2022), and to what extend an imminent omicron wave will sap demand.

Implications for interest rates in Singapore

Here in Singapore, the longer tenor 3-year and above fixed rates had risen fast and furious in the last few weeks in the run up to FOMC.  It has risen by approximately 40 basis points in short span of time as banks get hit by higher funding costs.  For example, on a $1m mortgage loan, the lowest 3-year fixed rate has risen from 1.10% back in November to the current 1.50-1.60% level.

Even 2-year fixed rates are now coming up gradually (lowest with a few banks left at 1.05-1.10%) to the 1.30% level.  Floating rate mortgages pegged to short term rates like SORA has not moved significantly yet, not until when Fed’s rate hikes get underway in 2022.  What this means is the gap between fixed and floating will widen over time.

There’s a tiny window now to lock down fixed rates while the gap remains small, but not for very much longer.  Speak to our team of dedicated mortgage consultants to stay ahead of the interest rate curve.

For example, on a $1m mortgage loan, the lowest 3-year fixed rate has risen from 1.10% back in November to the current 1.50-1.60% level.

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