Market expectations are rife that the U.S. Federal Reserve will hike interest rates to a high of 3 percentage points by the end of 2022 this year. If this happens, it would be the most aggressive hike by the US central bank since 2005 to control widespread inflation that is widely believed to be caused by the relentless printing of money to solve America's problems during the past 5 years. Their total liabilities is estimated to be more than $9 trillion mostly in the form of bonds.
The Federal Reserve had been massively printing money to purchase longer-term Treasury securities, e.g. bonds to keep interest rates low and money flowing through the economy during the pandemic as part of their efforts to support the economy through quantitative easing. Those purchases inject money into the economy to lower interest rates and therefore encourage lending and investment but the surge in prices has forced The Federal Reserve to dramatically rethink their monetary policy.
The federal funds rate sets how much banks charge each other for short-term lending, but also is tied to a variety of adjustable-rate consumer debt. Along with the strategic move to raise interest rates, the central bank also indicated it will begin reducing asset holdings on its $9 trillion balance sheet.
The Federal Reserve had been massively printing money to purchase longer-term Treasury securities, e.g. bonds to keep interest rates low and money flowing through the economy during the pandemic as part of their efforts to support the economy through quantitative easing. Those purchases inject money into the economy to lower interest rates and therefore encourage lending and investment but the surge in prices has forced The Federal Reserve to dramatically rethink their monetary policy.
The federal funds rate sets how much banks charge each other for short-term lending, but also is tied to a variety of adjustable-rate consumer debt. Along with the strategic move to raise interest rates, the central bank also indicated it will begin reducing asset holdings on its $9 trillion balance sheet.
The 50 basis point rate hike by The Federal Reserve on 4th May 2022 that pushed the federal funds rate to a range of 0.75%-1% shocked the market as most were only expecting a 25 basis point hike by the central bank.
However, the Federal Open Market Committee (FOMC) minutes released by The Federal Reserve on Wed 25 May 2022 mentioned “Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings,”. In addition, Federal Open Market Committee (FOMC) members indicated that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
The Federal Reserve officials had earlier this month stressed the need to raise interest rates quickly and possibly more than markets anticipate to tackle a burgeoning inflation problem, minutes from their meeting released Wednesday showed.
However, the Federal Open Market Committee (FOMC) minutes released by The Federal Reserve on Wed 25 May 2022 mentioned “Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings,”. In addition, Federal Open Market Committee (FOMC) members indicated that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
The Federal Reserve officials had earlier this month stressed the need to raise interest rates quickly and possibly more than markets anticipate to tackle a burgeoning inflation problem, minutes from their meeting released Wednesday showed.
The FOMC holds eight regularly scheduled meetings during the year and other meetings as needed. Real estate consultant Kiwi Lim believe that the minutes released yesterday imply that future Federal Reserve rate hikes this year may no longer be 25 basis point hikes but 50 basis point hikes. As of now, it seems the FOMC has approved half percentage point hikes in their plan to reduce the central bank’s $9 trillion balance sheet consisting mostly of Treasurys (bills, notes, bonds and securities issued by the United States Dept of the Treasury are Treasurys) and mortgage-backed securities starting from next month in June 2022 in their desperate attempt to pull down inflation running at a 40-year high.
From the FOMC minutes, Kiwi Lim expects home loan interest rates in Singapore to reach 3% by the end of this year, slightly earlier than market prediction of next year. Even at 3% interest rate, Kiwi Lim believe home owners in Singapore have holding power as our current TDSR for property buyers taking bank loans used the worst case scenario of 3.5% int rate to approve home loans. In addition to that, the TDSR also assumes that the borrower took a huge pay cut of 45%. Any borrower who passed this stringent TDSR stress test probably has the means to hold. Moreover, the LTV for the loan is maxed at 75% and not 90% like previously in 2005 therefore greatly limiting loan exposure.
From the FOMC minutes, Kiwi Lim expects home loan interest rates in Singapore to reach 3% by the end of this year, slightly earlier than market prediction of next year. Even at 3% interest rate, Kiwi Lim believe home owners in Singapore have holding power as our current TDSR for property buyers taking bank loans used the worst case scenario of 3.5% int rate to approve home loans. In addition to that, the TDSR also assumes that the borrower took a huge pay cut of 45%. Any borrower who passed this stringent TDSR stress test probably has the means to hold. Moreover, the LTV for the loan is maxed at 75% and not 90% like previously in 2005 therefore greatly limiting loan exposure.
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