central bank of United States of America

US Fed Hikes And Maintains Forecast

In its final FOMC for the year, US Federal Reserve accomplished what it sets out to do for 2017 with a forecast of three rate hikes before the year started – it moved the Fed funds rate up by 25 basis points to a range of 1.25% to 1.50%.

In her final press conference after the FOMC, outgoing chair Janet Yellen announced the much anticipated rate hike and more importantly maintained the forecast of three hikes in 2018 and two more in 2019 for the funds rate to hit 2.70% by 2020. She also added how the committee sees the US growth as stable moving forward and not on the back of an unsustainable run-up in debt like in previous expansion. The committee also priced in the likely fiscal tax stimulas with a sharply-revised US GDP forecast for 2018 from 2.1% (back in Sep FOMC) to 2.5% full-year growth. This year’s forecast for GDP is at 2.5%.

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Here are the rest of the highlights from Dec FOMC:

  • GDP forecast revisions: 2018 at 2.5% (up from 2.1%), 2019 at 2.1% (up from 2%), 2020 at 2% (up from 1.8%)
  • Unemployment rate to fall from the current 4.1% to 3.9% by end 2018
  • Fed funds rate forecast maintained at 3 hikes in 2018 and 2 more in 2019 to reach 2.70. Policymakers’ median estimate of funds rate at end of 2020 raised from previous 2.9% to 3.1% suggesting two further hikes in 2020
  • Core inflation (exclude food and energy prices) forecast to hit 1.5% this year, 1.9% in 2018 and 2% in 2019.

The Fed re-iterated that they continue to see “labour market conditions strengthening” and “economic activity rising at a solid pace” and believe inflation will slowly drift towards their target of 2% in the medium term. Inflation has been at the heart of policy debate on rate hikes with many believing that there are deep structural factors behind the anaemic rise in prices over the last few years like online shopping, technological disruptions and demographic changes.

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For us here in Singapore, SIBOR has started to move since last month to reach 1.21 (3-month) and 1.09 (1-month) as at last week. The two questions we need to ask: Will it continue to rise as we head into 2018? And when would the banks here move up their mortgage rates as a result of rising cost of funds?

Our own forecast of the benchmark 3-month SIBOR is for it to hit 1.25 to 1.30 range by end of 2017. We will review that in a few weeks’ time when we cross into the new year. That aside, the consensus by most is for SIBOR to rise up in 2018. Incidentally, I have read one bank’s forecast for it to hit 1.70 by end of 2018.

The second question is easier to answer albeit we have erred in forecasting local banks to start moving up their FDR home loan pegs earlier in July this year after we noticed a round of tweaking on their respective FDR tranches in Q2 where DBS home loans shifted from 18-month to 9-month, and OCBC home loans shifted from 36-month to 48-month and then to 15-month. No one has yet moved their FDR with SIBOR staying down even after two hikes from Fed in the first half of the year. At one stage, that traditional correlation between SIBOR and US funds rate seem to have broken down which had most economists scratching their heads.

However, SIBOR has since played catchup in the final two months of the year with 3-month SIBOR slowly rising from 0.99 in July to the current 1.21. Now with the third US rate hike in the bag, and we also noticed another round of tweaking on FDR home loan tranches of late (SCB moving from 48-month to 9-month and UOB moving from 15-month to 14-month), we are going to stick our neck out again and predict that local banks will hike FDRs by Q1 2018. It could come as early as in January especially if SIBOR continues on its slow ascend from here to go above 1.30.

Along with rise in borrowing costs for banks, fixed rate packages will be the first to end. Already the local banks have moved up their 3-year fixed to a higher level of 1.85% last month. There are now just two banks left with 3-year fixed at 1.68% and my advice is for homeowners to quickly take action before it ends.

Speak to our consultants today for the best Singapore home loan rates and find out how, besides saving you interest costs with the right package, we also bring you big savings in transaction costs, especially if you are looking to buy condo in Singapore!

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest trends in the industry, providing useful mortgage tips, and making sense of rate movements. We aim to build trust with clients for longer term partnership and not just do product-pushing for a one-time deal unlike bankers. That’s why we always present “whole-of-market” perspective including packages that banks do not pay us. That’s why many have chosen to work with us in the end notwithstanding the sheer number of brokers and agents out there.

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