US Fed just ended its final FOMC for the year with a policy statement that is largely in sync with what the market is expecting to hear – it will be a wait-and-see for 2020. Unless there is a sudden deterioration in the US economy as a result of prolonged trade tensions between US and China, the Fed is neither likely to hike nor cut rates. In short, the Fed will be on hold for much of 2020.
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Having said that, four of the 17 voting Fed governors still signal one rate hike in 2020. And over the course of the next few years, barring any downturn, the Fed’s medium estimate is for the funds rate to go up by 0.25% (or one hike each) in 2021 and 2022. Eventually the Fed hopes to achieve the longer-term neutral rate of 2.50%.
The statement comes as no surprise as the latest job numbers in the US is a strong 266,000, way above the consensus average of 180,000. In fact, the US economy is showing great resilience with jobs growth at averate of 205,000 over the past three months. Unemployment rate is now down to 3.5%, a record low in the last 50 years. The Fed has left its forecast for GDP growth unchanged at 2.2% in 2019, 2% in 2020 and 1.9% in 2021. Unless trade war escalates.
The key indicator we watch over here is inflation. Officials still expect it to rise very slowly but it should stay within the comfort level of Fed’s 2% target. In the words of the Fed chair Powell “it would take a significant increase in inflation” for the Fed to raise rates again.
In our view, the latest Fed meeting is really a non-event. It simply underscores our view that – no one can tell you how rates are going to move in 2020, not even Jerome Powell. A lot depends on the final outcome of a phase one trade deal, and if tariffs are removed. And then there is still a phase two agreement which might take even longer time to nail down in the midst of a US presidential mid-term election.
What is helpful though to know is this – unless the global economy slips into a recession as a result of tariffs war and Fed resumes rate cuts by the 2nd half of 2020, interest rate is likely to trade sideways from here. This essentially buys homeowners another year of “wait-and-see” and the best thing to do is to stay nimble and flexible. Go for the shortest lock-in wherever possible.
There are other considerations for home loans besides the headline interest rate per se. With interest rates crashing by some 60 basis points from levels at the start of the year (average of 2.30-2.40% in Q1 vs 1.80% now) and with rates expected to stay flat for another year, we think choosing the right home loan features might save you more in the long run. Find out more from our experiend team of mortgage consultants today.
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