As it turns out, we were right once again to predict 2 rounds of rate hikes this year.
Janet Yellen and company has signaled after its latest March FOMC that Fed would now raise rates more gradually than what it previously forecast amid a weak global economy and market volatility. Still analysts now take that to mean that even a rate hike by June is doubtful. We take the view that it may still be on track. As what we have earlier explained in this blog, a lot depends on the resolve of Chinese government to stem the decline in GDP growth and restore market confidence swiftly taking no more than 6 months in this process. If the market volatility continues for longer than 6 months, it may cause confidence crisis to spill over to the real economy and from then on things will go downward spiral and harder to predict. We do not think so.
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Fed has kept its federal funds rate unchanged this time at 0.40% after making the historical move in almost a decade to hike rates from near zero in December last year. Unemployment has now returned to near normal levels of 4.9% and is expected to trend further down to 4.7% by end of the year.
In it latest statement, shrugging off recent rally in financial markets which seem to have stabilized after the most turbulent starts in as many years, Fed acknowledged that the pace of recovery in many other economies seem to be much weaker than earlier anticipated, including China, Eurozone and emerging markets. Yellen noted that although US market surprisingly remained very resilient in the face of global shocks in recent months, the committee needs to see more evidence that labour market conditions will continue to improve further notwithstanding such weaknesses from abroad, before continuing on any further tightening.
Fed now forecasts two rounds of quarter percentage increase this year instead of the earlier four during December’s FOMC. They expect the federal funds rate to end 2016 at 0.9% instead of the earlier 1.4%. Accordingly it also adjusted down the benchmark rate to end 2017 and 2018 at 1.9% and 3% respectively. It has also revised down GDP growth for 2016 to be at 2.2% instead of the earlier 2.4%.
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Overall we were right to premise our view of rate hikes largely on one single number – inflation. It has stubbornly refused to come anywhere near to Fed’s target of 2% in the long term. Even though Fed has cited strong job gains in recent months and improving housing market, it remained concern on inflation being persistently low for long periods especially with other central banks going the reverse direction and a weakening global economy. This is the key number we will be watching out for and the one that has gotten the most of our attention in this latest FOMC statement. Its preferred measure of core inflation (excluding food and energy costs) is now up by 1.7% in recent months but obviously Fed does not epect this pace to be sustainable maintaining its forecast on inflation to end 2016 at 1.6%.
With this latest statement from US Fed, we maintain our view and forecast that SIBOR in Singapore will see an increase of 0.50% for 2016 to end the year in the region of 1.50 to 1.80%.
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