Fed’s F1 Race To The Top

It’s F1 race weekend in Singapore as many await to see who crosses the finishing line first.  Wih 6 races left and without a single win, it’s hard to imagine one of fan’s favourite and seven-time champion Lewis Hamilton piping runaway Max Verstappen to the Singapore F1 crown. That will be good to see.

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U.S. Fed is engaging in its own F1 race – to get to the top for federal funds rate quickly!  This is the fastest ever tightening cycle with 400 basis points or 4% unleashed (if it gets to 4.40% by year-end according to dot plots) within nine months.  The typical pace for Fed hikes in a normal cycle would be four 0.25% hikes in a year which will take them four years to do the same.   It’s also hard to imagine Fed not crashing the economy or causing some financial turmoil at such F1 speed.

That’s what the stock market is telling us too for 2023 – if you believe that the market always get ahead of things.  Already you are seeing signs of destabilisation around the world with central bank interventions in their own bonds and currency markets due to a runaway dollar.  The effects of a strong dollar has yet to be factored in fully in corporate America’s earnings which will become more evident in the coming quarters.  That’s not all.  Demand destruction is happening slowly but surely with more layoffs announced and the latest news of stock maket barometer (7% weighting in S&P 500 index) Apple reducing its production on iphone 14 with weak demand forecasted.  People are trimming expenses to cope with rising inflation.

In recent years, unexpected events can unfold quickly.  So, Ukraine war could suddenly end with collapse of power on one side.  New virulent covid-10 variant could surface and become dorminant strain within 2-3 months (this we certainly hope not). China could suddenly stop its covid-zero policy after the 20^th National Congress of the Chinese Communist Party next month in October.  Likewise, if financial markets seize up, what which took the Fed nine months to tighten could quickly unravel within nine months.  The real test for Fed is in 2023 when economic pain intensifies and political pressure mounts.

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We are not economists and we certainly cannot predict the future.  But as what we’d been saying consistently in this blog, the bottomline is – this is the fastest tightening cycle by U.S. Fed.  As a result, consequence and events will unfold quickly.  Don’t lock yourself in for too long in an uncertain world when it comes to mortgages, lest you be caught off guard.  This is the best advice we can give when fixed rate home loans now go above the long-term average interest of 2.50%.  Obviously, banks will want to lock you in for higher fixed rates and for longer.  It becomes a hugely profitable bet if rates go south quickly.  Caveat Emptor!

Stay tuned to the race this weekend and enjoy.  Better yet, win your “own championship” in mortgages by working with the team that gives you the best car, know-how and strategy.  Speak to us today.  

Likewise, if financial markets seize up, what which took the Fed nine months to tighten could quickly unravel within nine months.  The real test for Fed is in 2023 when economic pain intensifies and political pressure mounts.

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