If the Fed’s decide to cut interest rates, the lackluster property market may get a boost
The United States’ Federal Reserve has sent a very strong signal that it’s ready to consider cutting interest rates and with that, the Dow surged more than 500 points.
“We are closely monitoring the implications of these developments for the U.S. economic outlook, and as always, we will act as appropriate to sustain the expansion,” Fed Chair Jerome H. Powell said Tuesday during a speech in Chicago. He signaled that signaled the Fed, which is the central bank of the US, would act if President Trump’s multi-front trade war mushrooms.
Speaking at the “Conference on Monetary Policy Strategy, Tools, and Communications Practices” sponsored by the Federal Reserve, Federal Reserve Bank of Chicago, Mr Powell said the conference was part of a first-ever public review by the Federal Open Market Committee of our monetary policy strategy, tools, and communications. He said while central banks face a challenging environment today, those challenges are not entirely new.
“In fact, in 1999 the Federal Reserve System hosted a conference titled “Monetary Policy in a Low Inflation Environment.” Conference participants discussed new challenges that were emerging after the then-recent victory over the Great Inflation. They focused on many questions posed by low inflation and, in particular, on what unconventional tools a central bank might use to support the economy if interest rates fell to what we now call the effective lower bound (ELB). Even though the Bank of Japan was grappling with the ELB as the conference met, the issue seemed remote for the United States.
“The conference received little coverage in the financial press, but a Reuters wire service story titled “Fed Conference Timing on Inflation Odd, but Useful” emphasized the remoteness of the risk.2 Participants at the conference could not have anticipated that only 10 years later, the world would be engulfed in a deep financial crisis, with unemployment soaring and central banks around the world making extensive use of new strategies, tools, and ways to communicate.
“The next time policy rates hit the ELB—and there will be a next time—it will not be a surprise. We are now well aware of the challenges the ELB presents, and we have the painful experience of the Global Financial Crisis and its aftermath to guide us. Our obligation to the public we serve is to take those measures now that will put us in the best position deal with our next encounter with the ELB. And with the economy growing, unemployment low, and inflation low and stable, this is the right time to engage the public broadly on these topics.”
Sarah Bloom Raskin, a former Federal Reserve governor who commented on Mr Powell’s speech said, this is the strongest message yet to markets that’s indicating that a interest rate cut is coming. Speaking to CNBC she said, “This is, in essence, a very strong signal that the FOMC (Federal Open Market Committee) is actually ready to talk about cutting rates.”
The FOMC is responsible for deciding American monetary policy, is scheduled to next meet on June 18-19. It is widely expected that it would cut interest rates when it next meets.
If indeed the Fed’s cut interest rates, it would be good news for borrowers in Singapore. This is because the US Fed rate hike has an impact on credit cards, mortgages, vehicle loans and bank savings accounts here. This is because Singapore interest rates are closely correlated with those in the US.
The Fed’s decision to cut interest rates is expected to have an impact on credit cards, mortgages, vehicle loans and bank savings accounts here. This is because Singapore interest rates are closely correlated with those in the US. The SIBOR (Singapore interbank offered rate) for example is expected to go down. This could bring back some of the enthusiasm in the property market.
Since the beginning of last year, banks have raised interest rates for both fixed and floating home loan packages by 10 – 30 basis points (bps). Some banks have already upped their mortgage rate to 2.05 per cent, to keep pace with the increasing interest rates.
Sibor Sor Rates – 27 May 2019
If the Fed’s decide to cut interest rates, it may lead to a more buoyant property market here, with the property prices which were subdued by the Government’s new cooling measures introduced since July last year, rising. Buyers of investment properties may also exercise lesser caution when interest rates are lower. Buyer sentiment may also become positive knowing that they have better ability to service the mortgage on a property.
For example, a 1.75 per cent interest rate cut by the Fed’s would translate into 25 basis points (bps) decrease. For every 10 basis points decrease on a $100,000 loan over 25 years, the monthly installment goes down by $4.80. This means that for a $1 million loan, the buyer would have to pay S$120 less every month.
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