Interest Rate Outlook

Financial markets watch closely for signs in latest Janet Yellen’s speech that she delivered at the Fed’s annual economic policy conference in Jackson Hole yesterday in the State of Wyoming (mid-western state above Utah and Colorado) but still leave much for interpretation at the end.

Here at MortgageWise.sg we do track closely as well every event that comes out from US Fed Reserve knowing full well how any movements in interest rate will be pre-cursor to Singapore’s mortgage benchmark rate which is effectively a laggard.

Our reading here is that Yellen seems to be taken a path back to the middle even after sterling economic data last month (of a Q2 GDP growth of 4%) which all but has most analysts believing a much earlier rate hike from mid-2015 to somewhere early part of the year.

The key points of her speech are as follows :

• She acknowledges the difficulties in deciphering between structural changes or cyclical factors causing what is still a poorly functioning labour market even 5 years after the Great Recession.
• Certain slack in the labour market like the low participation rate and the high no of involuntary part-time work are not captured in the official unemployment rate which has dropped to 6.1% in an unexpectedly fast pace.
• In particular this is the first time she argues at length for the possibility of structural forces at work causing such slack
• One good example is the structural shift of the US economy away from goods production to the services sector which has traditionally seen higher proportions of part-time jobs.  So it becomes harder to discern how much in the rise of involuntary part-time work is coming from such structural changes.
• Hence being unsure of the forces at play it will be more prudent for Fed to maintain its easy policy for a while to address concerns of long-term unemployment and a low market participation rate.
• Overall she does appease more of the doves who wants the central bank to maintain its current easy policy, while re-iterating it will not hesitate to start rate hikes before it leads to inflation.

We think that the latest from Fed does not change the view that the 1^st interest rate hike will come likely in the middle of 2015.  A lot is still unclear with the new geopolitical tensions rising in middle east as well as Ukraine with EU countries already registering slower growth in Q2 (Germany slip into negative 0.2% growth in GDP, France is flat while Italy contraction widens to negative 0.2%).

Some believe that if the slowdown in EU continues it will definitely hit US sooner or later.