Following the latest press conference after US Fed’s March FOMC meeting, the market is treated to another roller coaster ride on the guessing of the timing for the first lift off in interest rate – June or September or later? Evidence now suggests it might be later as Fed now downgraded slightly the economic and growth outlook due to weak exports and a sluggish housing market, evident from its downwards revision of forecast; median interest rate forecast for the end of 2015 is now 0.625% from 1.13%, and just below 2% by end of 2016.
Policy makers also reduce their forecasts for economic growth for this year from the earlier 2.6%-3% to 2.3%-2.7%. With inflation still weak they also adjusted their estimate for annual inflation down to the range of 0.6%-0.8% this year, from the previous forecast of 1%-1.6%, but unemployment rate is now expected to fall further to Fed’s long-run goal of 5-5.2% by end of the year from the current 5.5% with strong jobs growth.
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In recent months, Fed has struggled to calibrate appropriate policy response to the unusual combination of anemic inflation in the midst of a surging labor market (295,000 jobs added last month in February) which has yet to translate to strong wage growth beyond the current 2% pace. It is believed that wages will eventually catch up as labor market tightens and companies compete for fewer workers. When that happens inflation might finally start rearing its ugly head. At the moment however the twin effects of low oil prices and the strong dollar which makes US imports cheap have kept inflation at bay and there is no urgent need to raise rates.
Janet Yellen re-iterated her belief that this meager inflation (at 0.2%) is “transitory” as she expects oil and gasoline prices to rebound later in the year and wage increases to show up in the data.
Overall, the Fed has indeed removed the last obstacle to rate hike by removing the pledge to be “patient” from its latest forward guidance, but cleverly managing the market’s expectation by clarifying that does not mean a rate hike in June, or neither will it rule out such a possibility. What Fed has committed itself to is to raise the federal funds rate only when it sees further improvements in the labor market and is reasonably convinced that inflation is on its way back to the 2% objective over the medium term.
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Here at MortgageWise, we are not totally convinced that the lift off will not happen in June. A lot depends on the economic data coming out of the upcoming 2ndquarter as Fed has cleverly negated itself of committing to a June or a September rate hike by underscoring the need to observe labor market and inflation data. To us that is as good as saying anything is possible and it could still be June or later depending on what we see and observe in the economic data.
In keeping with our earlier forecast, we still believe that the full effects of the oil price crash will only be felt fully 6 months later which will be in this coming 2nd quarter which also coincides with the end of harsh winter months and the arrival of spring. And given that US economy is 70% driven by consumer spending, we should see some signs of inflation gathering pace in the next 6 months though we cannot be 100% accurate.
Translating that back to Singapore market, 3-month sibor has more than doubled to 0.93 (as at 18 March) in the last 6 months and we are expecting a more gentle rise from here until it stabilizes in the 1.2-1.5% when US starts its first rate hike. Even in the event of a delayed rate hike, we do not expect this trend to reverse and hence it does warrant a serious look at fixing your mortgage cost now in this 3 month window which we talked about earlier, before all fixed rate home loans go above the 2% p.a. level.
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