Fed’s done with money-printing soon!
That’s exactly what we said in our last post – U.S. Fed is readying itself to be in a position to lift-off (on interest rates) by second half of 2022. Should inflation spiral out of control, that can even come as early as mid of 2022 to which Fed Chair Jerome Powell just affirmed this view – “a tapering process that concludes around the middle of next year is appropriate”, he said.
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In the latest September Fed FOMC, half of Fed officials (nine out of 18) now pencil in a first rate hike in 2022, up from seven in the last meeting. If inflation does not shoot up unbridled, this should happen in December or towards the end of the 2022 in Q4. That’s the general expectation.
However, as there are now more signs of inflation being more than transitory which Fed officials admitted as much, there’s urgency to quickly get all those asset sale, or tapering, over and done with. This is to allow Fed to pull the trigger (lift off in rates) as early as June 2022 should inflation become too hot to handle.
Still, all that is not cast in stone. Even Fed itself, with some of the smartest brains on earth, cannot say for sure the trajectory of rate hikes will proceed as forecast. That is the most likely path based on all the evidence we’ve seen, provided three things happen: economic recovery remains on track after being bumped off track by Delta; there’s no other worst covid-19 variants to emerge out of nowhere; and finally no other significant adverse events to cause another global meltdown.
Plain and simple. That’s how we read the signals here at MortgageWise and how we see interest rate movement from here. We’ve been doing that consistently over the last 8 years with a certain degree of accuracy (see the summary here). Now, to answer more directly to that question – fixed or floating rate? We think both are ok as SORA (the new benchmark interest rate in Singapore) is not expected to move up in any significant manner, not until U.S. Fed finally lift off on rates. More crucially, you need to make sure your next lock-in ends in 2023 where it’s at that most pivotal moment in the interest cycle, to decide if you should go long on fixed rate from that point on. There will be more clarity by then. Yes, U.S. Fed may have already lifted off on interest rates by Dec 2022 (if it goes according to plan or forecast), but can they sustain the series of rate hikes which they put it at three in 2023? That’s still a question mark.
More crucially, you need to make sure your next lock-in ends in 2023 where it’s at that most pivotal moment in the interest cycle, to decide if you should go long on fixed rate from that point on.
Compare All Latest Rates 2021
Here’s what could happen. If you pick fixed rate, which is at all time historical low, you certainly will enjoy peace of mind over the next few years. But if you are not careful, you do run the risk of over-stretching the lock-in period to find your loan expiring at the time when fixed rates would have already catapulted past 2.00%! This is the scenario where inflation run riots and Fed is forced to slam on the brakes hard by hiking rates in quick successions. Personally, I find that scenario less probable. It’s interesting though there are many prominent business leaders and economists with the fear that Fed may be “behind the curve”.
If you pick floating rate home loans now, you might find that small gap between floating and fixed rate all but disappear even before Fed starts to hike in 2022. We might see some slight movements in money market the moment U.S. Fed starts mopping up liquidity via bond sale commencing in November 2021. I am not the expert here, so that remains a gutfeel. My three simple and logical arguments for that: the gap is so close now (within 20 basis points or 0.20%); the underlying SORA peg being an overnight lending rate is sensitive to demand and supply; and it’s always easy to rise up from a low base, at least initially.
Confused by now? Speak to our team of dedicated mortgage consultants who will share with you more how to best position yourself to catch the next cycle-turning moment.
But if you are not careful, you do run the risk of over-stretching the lock-in period to find your loan expiring at the time when fixed rates would have already catapulted past 2.00%!
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