The latest US Fed’s September FOMC unfolded just as the market expected with little surprises – funds rate held steady in the range of 1% to 1.25% and unwinding of the massive US$4.5t QE asset purchase program announced earlier to start in October next month. Perhaps the only unexpected move to some is that the Fed also signaled that the third and final rate hike for 2017 is still on track for December FOMC.
The Fed also made adjustments to some of their earlier forecasts, notably:
- Maintained three hikes in 2018 but adjusted down the no of rate hikes from three to two for 2019, and just one hike for 2020.
- Correspondingly revised down their longer term “neutral” Fed funds rate from 3% to 2.75%, in recognition of the persistently-low inflation.
- Lowered their inflation forecast from 1.7% to 1.5% for this year and that for next year 2018 from 2% to 1.9%.
Compare All Latest Rates 2019
Notwithstanding the impact of recent hurricanes which effect is expected to be short-lived, the Fed revised upwards the 2017 full-year GDP growth from 2% to 2.4% but conceded that the stubbornly-low inflation is a big mystery even for the Fed as they stumble on finding the root cause. While Yellen largely put the blame on declining cell phone charges in US which is temporary, the Fed cannot rule out possibility of other more structural causes like global competition or that coming from online stores. It has maintained the need to monitor inflation and wage growth figures closely and adjust its monetary policy in response. Overall with 11 out of 16 Fed officials holding on to one more rate hike in December, the underlying tone from Fed is that they still believe low unemployment will eventually lead to a rise in inflation.
The much-anticipated balance sheet unwinding program as announced earlier would start off next month with Fed opting not to reinvest the sales proceeds from bonds that mature monthly at the pace of US$10b per month initially, but gradually increasing this cap to US$50b per month within 12 months. This has the effect of taking away demand for Treasury bonds and mortgage-backed securities, creating a void where the private sector may not be able to fill, and hence put upward pressure on the long end of the curve.
After the Fed’s statement, the benchmark US 10-year Treasury note yields shot up to 2.29%. This is one of the key indicator we watch over here, along with inflation figures in US, in order to ascertain the direction of 3-month SIBOR in Singapore, the benchmark interest rate here.
We are still on track with our own forecast on SIBOR last revised in June – when we raised the number of rate hikes we anticipate this year from two to three, but lowered where we see 3-month SIBOR ending the year from 1.50% to a range of between 1.25% to 1.30%. It has creeped up quietly in July from 1% to the current 1.12% level. For SIBOR to creep up further we need to watch for direction on US 10-year yields and the strength of dollar against Sing. For now, we are maintaining our forecast on SIBOR.
Compare All Latest Rates 2019
If we are indeed proven right in our forecast where SIBOR end at its highest level in recent years, the current regime of low fixed rates will end the moment it starts moving again, possibly by next month. We urge all homeowners to take advantage of the current price wars in fixed rate mortgages before it ends. With low inflation globally, we do not expect interest rate to rise up in past cycles at 1% per annum. Still, it is not inconceivable to expect prevailing floating rates to rise up from the current 1.50% to slightly above 2% within a year. If one is able to lock down a 3-year fixed rate at sub-2% (currently 1.58-1.68%), that 50 basis points savings translates into $3,500 a year or $10,000 savings over a 3-year period on a typical loan of $700,000 for example.
So, make that move quickly and you could jolly well reward your family with a nice family holiday to Europe during the December holidays. Speak to our consultants today!
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