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.
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.
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.