central bank of United States of America

Fed still has a long way to go?

U.S. Fed has just enacted its eleventh-rate hike to bring the federal funds rate to its highest level of between 5.25 and 5.00 per cent since 2001.  Coming after a temporary pause last month, will this be the final one?

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The market is pricing in that right now even as Powell remains non-committal on whether another rate hike of 0.25 per cent is on the cards for September FOMC.  He said, “I would say it’s certainly possible that we will raise funds again at the September meeting if the data warranted”.  While in the same breath, he said it’s also possible that they might decide to hold steady the rate in September as they assess incoming data meeting by meeting.

Although the latest CPI for June has given Fed room for reprieve with headline reading dropping to 3% and core (excluding food and energy prices) breaking below 5% at 4.8%, the path downwards from here may be a slow and protracted one especially for core CPI.  Powell re-iterated in his news conference that hitting the Fed’s target of 2% “has a long way to go”.

We have since revised our forecast at mid-year to reflect this increasing likelihood that Fed will have to hold interest rate at this high level for a longer period into 2024, barring any unforeseen exogenous shock.  When it comes to interest rate here in Singapore, with regards to SORA, our view is that it has peaked at the current level of 3.50 to 4.00 per cent whether it’s another one or two more Fed rate hikes from here.

Until such time SORA starts to trend downwards, the inverted yield curve has caused floating mortgages rates to be almost 100 basis points (1%) higher than fixed mortgage rates which now languished in the 3.30 to 3.50 per cent range.  For those seeking refinancing, the temptation is to commit to one of these fixed rates in the next two years and not have to worry about how long more interest will stay high.  Whether that turns out to be the right call or not depends exactly on that – your view on the interest trajectory!  Just know that what may be perceived as 1% lower today might be deemed 1% too high if prevailing floating rates drop back to 2.00 to 2.50% by 2024. 

It’s not an unlikely scenario for SORA to fall back by more than 1% if you study the interest rate cycle closely.  This is what we do here at MortgageWise and you should speak to our consultants if you need more input before making an informed decision.

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With a resilient labour market in the U.S. which has caught everyone by surprise, Powell has updated that Fed economists no longer project a recession in their GDP forecast.   We think corporate earnings will be the thing to watch closely from here, other than the monthly inflation print.  That’s certainly a better gauge than following all the noise out there as sentiments swing from hawkish one month to dovish the next, depending on which data comes out on top.

Hence, work with us long-term.  We’ll watch your back in your next mortgage review as we pick up signals when to switch tact should labour market conditions start to crumble.  No one can say for sure yet that it won’t take a recession to bring inflation down, including the Fed.

Just know that what may be perceived as 1% lower today might be deemed 1% too high if prevailing floating rates drop back to 2.00 to 2.50% by 2024. 

Need more advice?  We don’t just throw you a set of rates, or get different bankers to sell to you.  Not only do we help clients navigate through Singapore mortgage rates quick and fuss-free, we show you how best to position and profit from the interest rate cycle, be it for residential or commercial property loan. Work with us today and you’ll also be helping to support our social cause!

Stay tuned for rate alerts on our Telegram channel SG Mortgage Rates.

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Disclaimer: MortgageWise.sg endeavours to bring the best insights and knowledge in our expert domain of mortgage planning to the market.  Still, all viewpoints expressed in our blog remain as opinions of the writer, and shall not be constituted as financial advice.  We cannot be held responsible in any way for any financial losses arising from your mortgage decisions should you choose to rely on any of our viewpoints and opinions.