us federal reserve bank

US Fed Signalled Readiness To Act

Just as what the financial markets expected, US Fed left rate unchanged in its latest FOMC meeting for June but indicated its readiness “to act appropriately to sustain the expansion”.

However, based on the dot plots from the committee of Fed governers, which represents what Fed believe is the most likely scenario going forward, there is a revision of interest rate forecast downwards for 2020.  In fact, almost half or 7 policymakers out of 17 voted for as much as half a percentage point cut in rates for this year which means two rate cuts to come in the next six months if more officials get onboard this view.

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The Fed has readied itself for a first rate cut as early as next month in July depending on the outcome of the now confirmed and extended meeting between Trump-Xi in G-20 next week in Japan.  The word “patient” has been dropped from policy statements which the market interpreted as a sign of readiness to act.  Fed chair Jerome Powell explained in the press conference after the meeting that the Fed is adopting a “wait-and-see” stance with a confluence of mixed signals. On one hand, the American economy has performed relative well with consumer spending rebounding in quarter two and with the labour market still strong with low unemployment.  On the other hand, inflation has strayed further down from its 2% target range to now 1.50%, business capital spending has dipped and there is increased risks from “crosscurrents” re-emerging from tariffs war and global slowdown.  As such, the Fed has voted to hold the fed funds rate in June at between 2.25% and 2.50% but is prepared to intervene the moment incoming data suggests any downside risk to the outlook.

Other notable statements from FOMC Jun include:

  • The committee, about evenly-divided on the need for rate cuts in 2019, has held fed funds rate at 2.40% by end 2019 (unchanged) but now revised its forecast down for it to end at 2.10% by end 2020 which signalled one rate cut in 2020.
  • The US GDP has grown by 3% in Q1 but this is now expect to moderate down to 2% range in the remaining quarters of this year, depending on the outcome of the trade war.
  • Unemployment rate has been revised down slightly for both 2019 and 2020 to 3.6% and 3.7% respectively.
  • Inflation – the most important indicator behind any Fed action, has continued to remain subdued despite wage growth. Fed’s preferred measure of inflation has in fact tumbled and is now expected to stay only at 1.5% by end of 2019 versus its earlier forecast of it hitting 1.8%.

The muted inflation has in fact given Fed the room to manoeuvre and be more aggressive in rate cuts should there be further fallout from the trade war between US and China in the second half.  In conclusion, the baseline case is that US economy is still performing relative well, but this is a Fed that is more ready to act now than before by cutting rates as much as two times before the year is over, should trade tensions escalate and affects the real economy.

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Here at MortgageWise.sg, we do a mid-year review of our rate forecast given at the start of the year which is for one rate hike by end 2019.  This is premised on a favourable outcome in US-China trade negotiations which has since turned sour in the last month.

We have already said that this year is going to be the most difficult year to make a forecast on interest rate direction as a lot depends on the outcome of the trade talks and that is not something we can predict.  Still we will not shy away from sticking our neck out as usual.  After the latest Fed meeting, the odds have gone up for two rate cuts by US Fed this year.  Most believe that the two world leaders will simply agree to resume the trade negotiations after G-20 and it is still unclear how long it will take for consensus to be reached, if at all.  We are revising our forecast down as well to now expect one rate cut instead of a rate hike, before the end of 2019.  I still believe that there is too much to lose politically for both sides not to reach a consensus especially on the part of China, in my opinion, who has more to lose from a prolonged tariff war.  However, it is highly likely the effects of the new tariffs put in place by Trump administration not too long ago will now trickle down to the real economy affecting jobs and consumer sentiments in the second half of the year.  In fact, this is also what China is betting on by playing hardball with US and we would likely also see weakening data in US in the coming months which is going to force US Fed into easing.  Thus, we think Fed will cut rate by 0.25% in a pre-emptive move or “insurance cut” if you like, either in July or latest by September FOMC regardless of the outcome of the trade talks.  This is simply to keep the current 10-year economic expansion on track albeit at a slower pace.

Should talks break down and Trump slaps 25% tariff on the remainder of $300b China exports to US not already taxed, I think inflation will show an uptick by December or early 2020 and Fed will be caught between a rock and a hard place.  So one rate cut will be sufficient for 2019 for a “wait and see” in order not to dwindle down too much on Fed’s ammunications for a full-fledged recession at some point.

With a rate cut projected in 2nd half, we also revised down our forecast for 3-month SIBOR to end the year at 1.8-1.9% now.  It is currently at 2%.  1-month SIBOR will also likely slide back 15 basis points to the 1.75% range.

Those whose home loan is up for renewal could contact us for a more detailed advice on what’s the best mortgage strategy in an uncertain marco environment going into 2020, and why remaining nimble becomes ever more so important.  You will also receive a $150 Refinancing Valuation Fee Offset, subject to min loan of $500,000.  New purchase home loans will also enjoy a Special $1,800 Purchase Legal Fee (includes mortgage stamp duty, gst) from our partner law firms.  Other terms and conditions apply.  So, speak to us today.

Since 2014, MortgageWise.sg has provided thought leadership in the mortgage planning space in Singapore, taking deep dives into the latest developments in the industry, providing useful mortgage tips, and making sense of rate movements.  We seek to build trust with clients over the longer term instead of doing product-peddling for quick one-time deals.  That’s why we always present “whole-of-market” perspective including home loan packages that some banks do not pay us.

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