central bank of United States of America

US Fed Walks A Tight Rope

Following its latest FOMC, US Fed has cut by another 25 basis points for the second time after first cutting rates back in July.  This brings the federal funds rate back to below 2%.  And it is ready to do another cut before the year is over as it signalled its resolve to “act as appropriate to sustain the expansion”.

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US Fed continues to walk a tight rope, as the policy-making committee of 17 voting Fed presidents show great dissonance this time with seven voting for more cuts by end of the year, five voting to hold the rate and the remaining five voting against recent cuts.

It is certainly no fun to be Fed chair in the current economic climate where there is so much uncertainties about how the trade war would pan out, while you have a US President that continues to rant on an “incapable” Federal Reserve chief with his latest tweets of “no guts, no sense, no vision” following the smaller-than-expected cut that Trump wanted.  No matter whether it’s cutting by 25 or 50 basis points, the Fed will be criticised for either doing too little, or pandering to the agenda of the political office of the day.  It’s an all-lose bet for the Fed chair.

I thought the Fed chair has done a great job to be calibrated in its response.  Doing a steeper cut than necessary might actually send the wrong signals to financial markets which already has seen many fund managers predicting a recession in the US by 2020.  The central bank doesn’t have much ammunition left to deal with that.  Many argued for steeper cuts of 0.50% now or it will be too late to do so when the economy does tank.  Again how early or how much is open to debate.

Instead of past FOMC posts where I summarize the economic indicators in the US like unemployment figures, GDP projections and inflation readings, which have remained somewhat similar as we still have strong consumer spending in the US, we will focus our commentaries more on interest rate trends back home in Singapore.

Following the rate cut in July, 3-month SIBOR dropped from 2% to 1.88% and has since been at parity with 1-month SIBOR which has stayed stubbornly unchanged.  Will this latest cut finally push down 1-month?  From what we see happening in the mortgage market and if we believe banks are privy to trends in the interbank market (they know before anyone else), the answer is yes – very likely so.  Though we cannot predict with precision when and by how much it will move down.

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Understand that in recent months, banks have been pushing out lower and lower fixed rates like a race to the bottom.  Fixed rates have practically “crashed” since its peak at the start of the year at 2.48%-2.58% when we begin advocating a move back to floating SIBOR home loans. By June, banks are rolling out fixed rates at 2.1-2.2%.  Then DBS started slashing below 2% last month with its National Day Promotion of headline rates at 1.89%, 2.18%, 2.18% for a 3-year fixed rate home loan.  Now, almost every bank has deviated rates (not the official rates) below 2% and there are more than a handful with first two years fixed rate at 1.89%!

Banks always make money.  With a view that there is still room for rates to head further south, lenders are all out to lock homeowners down on fixed rates at 1.89-1.98% range, while they still can.  This has led to the anomaly of headline fixed rates going below floating rates, which only serves to get more people onto the fixed rate bandwagon, doing exactly the banks’ bidding.

With the latest rate cut and Fed’s signal of more cuts to come if necessary, it looks all likely that the down trend on fixed rates will continue albeit at a slower pace.  Where is the bottom?  We put it close to 1.60-1.80% level but whether we get there depends a lot on what the Fed does, which is in turn dependant on what happens in the trade talks between US and China resuming in October.  

Save on interest costs today by comparing home loans in Singapore.  You will be surprised – from experience there is always another bank hungrier for your business, thanks to free market.  Make yourself richer, not the banks.

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.

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