That’s looking likely when officials continue to push back on the notion of half-point rate cut of 0.50 per cent in September, even in the face of the latest U.S. unemployment rate rising to 4.3 per cent. And what’s the implication for that on your Singapore home loan?

There are talks of how a second recession indicator called the Sahm rule has been triggered once unemployment rate breaches 4.2 per cent, with the first indicator being an inverted yield curve for two years now.  The Sahm indicator basically signals possibility of a recession when “the three-month moving average of the national unemployment rate (U3) rises by 0.50 percentage points or more relative to its low in the previous 12 months.”

Some commentators may be right, there’s no need to make too much of a 4.3 per cent unemployment rate as it’s just data for one month.  Or launch into a discussion about another signal for recession as that too could turn out to be a smoke screen in this unusual cycle of economic boom-and-bust due to the pandemic.  But what that tells the Fed is a need for them to keep their ears firmly to the ground for further stresses and more economic hardship in the coming months.  If unemployment rate rises further above 4.5 per cent or beyond in a fairly short time, it means the labour market and economy is deteriorating fast especially when supported by “totality of the data” from like GDP, payrolls, PCE, etc.

I have alluded to how Fed should re-enact an “insurance rate cut” in the month of July for sentimental reasons (similar to 2019) in a recent article and I ought to be slightly disappointed when Fed kept policy rate unchanged this week and stuck to its stance of “the need to gain more confidence that inflation is firmly on its way down”.

However, it may not be such a bad thing after all for homeowners and borrowers.  This is because should U.S. economy deteriorates fast in second half of the year due to the long and variable lags of monetary tightening in the past year finally taking root and a delay in rate cuts, Fed officials might be forced to eat their own words and surprise the market with more aggressive 0.50 per cent cuts later.  They could even announce a 0.25 per cent cut outside of FOMC meetings which is not unprecedented.  Again, it all depends on the data over the next few months.

Implication on interest rate in Singapore

At MortgageWise, we’ve long advocated for the need to stay nimble so as to be able to respond to any sudden changes in the macro interest environment during cycle-turning years in 2023 to 2024.  True enough, even before Fed actually cuts, we have ruminated on the path of fixed mortgage rates in Singapore crashing more than 150 basis points (1.50 per cent) from its peak of 4.25 per cent in early 2023, down to the current 2.60* per cent in one latest bank promotion.

With consecutive and rapid rate cuts from the Fed, what we hope to see now is SORA to be dislodged from its entrenched position of 3.60 – 3.70 per cent in the past 1½ years, and start hurling down towards the 2 per cent mark just like in past cycles.

If we do get there, depending on how aggressive Fed cuts which is in turn dependent on whether we get to a mild or severe recession in the U.S or none at all, and with interest rates in Singapore normalising at those levels, you might agree with me that fixed home loan rates today are looking quite attractive.

…we have ruminated on the path of fixed mortgage rates in Singapore crashing more than 150 basis points (1.50 per cent) from its peak of 4.25 per cent in early 2023, down to the current 2.60* per cent in one latest bank promotion.

*Effective interest rate based on a $700,000, 20 years loan. Speak to us to find out more.

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