4 ways to cope with the US Fed’s latest big rate hike

TL;DR

• The US Federal Reserve (Fed) raised its benchmark interest rate by another 0.75 percentage points to 3.0-3.25% as expected.
• Notably, the Fed is projecting that interest rates will be higher for longer. Interest rates are expected to peak at 4.6% in 2023, and are not expected to start falling until 2024. 
• With the aggressive interest rate hikes, the risks of a global recession are higher and the US Dollar has strengthened against most currencies. 
• We’d be putting our spare cash into the Singapore Treasury Bill or Singapore Savings Bonds with rising interest rates. It might also be time to think about whether you’re getting the best mortgage, deposit account and currency exchange deals.  

What happened?

The US Federal Reserve (Fed) raised its benchmark interest rate by 0.75 percentage point (75 basis points) to a range of 3.0-3.25%. 

The hike should not be a surprise to investors, especially after last week’s red-hot consumer price inflation data. 

This marks the third consecutive 0.75 percentage point move, and would bring the interest rate to the highest level since early 2008 (yes, that’s before the global financial crisis).

But what truly disappointed investors, were comments by the Fed that there’d be more big increases to come. 

Stocks fell quickly at the back of the aggressive interest rate increases. The S&P 500 fell 1.7% at the close of trading on 21 September, and the Hang Seng Index was down about 1.9% at mid-day on 22 September. 

What does this mean for investors?

#1 - Interest rates may be higher for longer

If you need to know one thing about the Fed’s latest announcement, they are expecting interest rates to be higher for longer. 

The Fed’s long term rate projections, as indicated from the “dot plot”, now show that interest rates will reach 4.4% by end-2022. That’s another 1.25 percentage point of increase over the next 3 months. 

The Fed also projects that interest rates will peak at 4.6% in 2023, and are not expected to start declining until 2024.  

This is higher than the Fed’s previous projection in June, as well as what most economist were expecting prior to the Fed meeting in September. 

Many economists adjusted their forecasts based on the Fed’s projections quickly after. 

Close to two-thirds of economists are now expecting interest rates to be 4.25-4.50% by end-2022. 

Just a month ago, not a single economist was expecting interest rates to be so high. Most were in fact interest rates to be just 3.25-3.75% by year end.

By the middle of 2023, most economists are expecting interest rates to be 4.50-5.00%. Again, that’s a level that no one predicted just one month ago.

By now, you’d probably get the idea that interest rates are going up fast, and are likely to stay high for quite awhile. 

Source: CME

#2 – Concerns of rising recession risks

Apart from the higher interest rate projections, what also disappointed investors were signals from Fed Chairman Powell that a recession might the price to pay for bringing down inflation. 

Together with the interest rate announcement, the Fed also cut growth projections and raised its unemployment outlook.  

More notably, Powell’s commented that “the chances of a soft landing are likely to diminish to the extent that policy needs to be more restrictive, or restrictive for longer. Nonetheless, we’re committed to getting inflation back down to 2%.”

Yes, the Fed may not be explicitly forecasting a recession. But there is an admission that trying to control inflation while leading to only a small increase in joblessness will be “very challenging.”

Across the world, we have already seen signs of a slowing economy with rising interest rates.

Both the IMF and World Bank have warned of rising risks of a global recession in 2023. 

In August, Singapore lowered its GDP growth forecast for 2022 to 3% to 4%, from 3% to 5% earlier.

Regardless of whether we really go into a recession, we’d definitely need to buckle up for slower growth ahead!

#3 – US Dollar becoming stronger

The US Dollar has been strengthening with the aggressive interest rate hikes by the Fed. 

As interest rates in the US goes up, more investors might find it worthwhile to put their money in US Dollar denominated instruments, driving up demand for the US Dollar. 

As a member of the Beansprout community pointed out, the yield on the 2-year US Government Bond is now at 4.1%. 

For a US-based investor, that’s effectively a risk-free investment giving a return of 4.1% per annum. 

(If you are based elsewhere, there are other risks such as exchange rate risks to bear in mind). 

The US Dollar has strengthened against the Singapore Dollar this year from about 1.35 at the start of the year to 1.42 now. 

But the Singapore dollar has fared relatively better than a lot of other currencies.

The US Dollar has strengthened by 15% against the Euro so far this year. It is also up 26% against the Japanese Yen. 

You’d probably have seen many other news reports about the Chinese Yuan and Korean Won hitting multi-year lows against the US Dollar. 

The rising interest rate is already presenting headwinds for companies and governments as they’d have to pay more interest for their debt. 

The strengthening US Dollar presents an additional challenge for borrowers with US Dollar debt as they’d find it more expensive to be repaying such borrowing. 

What would Beansprout do?

It would seem like many things have changed overnight with the aggressive interest rate hikes by the Fed. 

But fret not, here are a few ideas of what you can do to cope with the rising interest rates

#1 – Singapore Treasury Bills/SSBs offer a safe and attractive yield

If you’re looking at a safe place to park your spare cash, the Singapore Treasury Bills and Singapore Savings Bonds might be interesting options to look at. 

Recently, the yield on the 6-month Singapore Treasury Bill reached 3.32%. And this was before the aggressive interest rate hike by the Fed yesterday. 

The Singapore Savings Bond offers more flexibility compared to the Treasury Bill, and allows you to earn a higher interest rate when you put your money in it for a longer period of time. 

#2 – Find the best deposit account for spare cash 

Make your spare cash work harder by finding the best deposit account. You wouldn’t want your deposits to be earning just 0.1% when they could be getting you an interest rate of 2.15% per annum. 

#3 – Think about whether to refinance your mortgage

For the homeowners amongst us, our monthly mortgage payments are probably one of the largest expenses to think about. 

If you are taking a bank loan for your HDB purchase, it might be worthwhile considering whether a HDB loan might be able to bring down your monthly mortgage payment. 

#4 – Lock in the best exchange rates

The Singapore Dollar has been strengthening against many other currencies (except the US Dollar).

If you are thinking of locking in the good exchange rates now for your year-end holidays, our guest contributor provides a few ways on how you might be able to do so.