U.S. Fed has just announced the sharpest increase since 2000 of a 0.50% in one single rate hike to bring the fed funds rate close to 1%, and indicated it has no intention to go beyond 0.50% per hike.
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That’s not so much news anymore if you consider how much has been written or said about it. Priced in. What’s more news to us is what the Fed is going to do in the next two FOMC meetings coming up in June and July before they go for a break in their annual Jackson Hole symposium in August. Now that Fed Chair Jerome Powell has also publicly ruled out any 0.75% increase in one fell swoop, the question is – will it be another one or two more of 0.50% increases? The best hint is given by Powell regarding moves of 50 basis points which he said “should be on the table at the next couple of meetings”.
Whatever the case, this is likely the fastest tightening cycle possibly in the history of Fed, or at least based on publicly-available data on the fed funds rate since 1987. We used to think that monetary tightening cannot be done overnight as rate hikes will take time to reach the peak which is typically three years. We are about to be proven wrong. For the first time, over the next few months, you can visually see on the historical chart that rates will go in an almost vertical line up! Fed will bring its funds rate to 2% level in three short months for what would usually take two to three years going by recent history.
Fed has also announced its asset sale program to trim its humongous balance sheet of US$9 trillion to commence from 1 June. It would start selling treasuries and mortgage-backed securities to the tune of US$47.5b per month at the start and ramping up to US$95b per month after three months. Now what that means is, at this pace, it will take the Fed five years to get its balance sheet back below the pre-pandemic levels of US$4 trillion. I think they might have to go faster than that at some point. In fact, we wonder if the Fed could ever return its balance sheet to its historical base levels of somewhat closer to US$2.5t. Tall order. We are likely to see stock market levels come down over time as this huge liquidity is being sucked from the system.
To sum up this rather uneventful FOMC meeting (as much has been priced in):
- Stock market rallied when they learnt Fed is not considering any 75 basis point hikes
- Fed assessed inflation may be peaking soon, taking some heat off the need to tighten fast
- Fed, while noting how historically it has been difficult to engineer a soft-landing, sounded confident that they can get inflation under control without tipping the economy into a recession. The underlying strength of the American households, businesses and labour market give it such confidence.
For the first time, over the next few months, you can visually see on the historical chart that rates will go in an almost vertical line up!
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What does that mean for interest rate in Singapore?
Much like what we have warned in recent months, home loan fixed rates had mostly catapulted above 2% by now. The speed of which caught many off guard including some mortgage brokers I suspect. The market enters a period of shock before it can come to terms with the new realities of first, a much higher fixed rate paradigm at 2.50%. Next, escalating floating rates over the next three months especially for those on home loans pegged to 3-month SIBOR.
Going forward, it becomes imperative to work with mortgage consultants who can dissect events, anticipate trends, offer accurate forecast and sound advisory on mortgage solutions. It’s no longer about who can give you the most voucher or cashback or the lowest headline rate. It’s no longer about which brokerage firm is the biggest or has A.I. capabilities (if that even matters at all in the first place).
As our advisory and forecast are exclusively for our clients only, the best thought I can leave with readers of this blog:
In an era of stagflation (if you believe so), interest rates might not necessarily come down in a big way even in the face of another recession, or slowing growth. How do you position your mortgage in such a context?
Compare Singapore home loan rates quick, fuss-free and reliably at MortgageWise.sg. If you have benefited from deep insights in our blog, imagine how much more you’ll save from our expert view-points & forecasts which you do not get from anywhere else. We help you to navigate interest rate cycle astutely be it for residential or commercial property loan. Work with us today and help support our social cause too!