Fed hikes again. Here’s what it means for T-bills, fixed deposits and stocks

What happened?

The US Federal Reserve has raised its benchmark interest rate by another 0.25%, bringing the rate to the highest level in more than 22 years.  

This has led to many questions about whether the rate hike could lead to higher yield for the T-bill and an increase in the fixed deposit rates. 

We’ll be sharing our key takeaways from the Fed’s latest meeting, and what this would mean for us as savers and investors.

What we learnt from the latest Fed meeting

#1 – Fed raises interest rates again

Earlier this week, the US Federal Reserve (Fed) raised interest rates by another 0.25% , bringing the Fed’s benchmark rate to 5.25-5.5%. 

The rate hike came after the Fed paused on its interest rate hikes in its previous meeting in June.

With the hike, the benchmark rate would be at the highest level since 2001. 

#2 – Fed left open the possibility of further rate hikes

As the latest hike was widely expected by the market, what investors were looking out more closely for was whether the Fed was going to signal any further rate hikes in the coming months.

Earlier at the June meeting, Fed Chairman Jerome Powell had indicated that we might see another two more rate hikes this year. 

At the press conference, Powell left open the possibility of further hikes. However, he emphasised that it will depend on incoming data in the coming months.

In particular, the Fed will be looking out closely for upcoming inflation data. The US consumer price index (CPI) rose by just 3% in June 2023 and falling from a peak of above 9% in June last year.  

#3 – Investors are expecting no further rate hikes

While the Fed left the possibility of further rate hikes open, investors are currently expecting that the most recent rate hike will be the last one this cycle.

Based on the CME FedWatch Tool, investors are expecting the Fed to maintain the benchmark interest rate at the current level until March next year.

Thereafter, investors are forecasting that the Fed could start to cut interest rates from May 2024 onwards. 

What would Beansprout do?

Following the latest Fed rate hike, US government bond yields moved higher, with the 1-year government bond yield now at close to 5.4%. 

We share one of the ways you can tap on the higher US bond yields here. 

Central Banks globally have also followed suit, with the European Central Bank also raising its benchmark rate by 0.25% this week.  The Bank of Japan announced that it will allow greater flexibility on its monetary policy, causing Japan’s benchmark bond yield to soar to a nine-year high.

This has also translated to elevated yields for the Singapore T-bill, with the cut-off yield on the recent 1-year T-bill reaching 3.74%. We analyse what this could mean for the upcoming 6-month T-bill auction here. 

The yield on the T-bill also continues to be higher than fixed deposit rates, especially as fixed deposit rates keep getting lowered. 

With investors expecting that this might be the Fed’s last rate hike, we have seen the US stock market continuing to rally. If you are looking to invest in the US market, we share how to choose between the S&P 500 ETFs.

Lastly, while the expectation that there might be no further rate hikes could be positive for Singapore REITs, we need to make sure that the REITs are able to generate higher rental income from their properties to offset their higher interest cost. Compare and select the best REIT for your portfolio using our REIT ideas tool.

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