This might be the Fed’s last rate hike – goodbye 4% fixed deposit rates and T-bill yields?

What happened?

The US Federal Reserve has raised interest rates by another 0.25%, bringing the benchmark federal funds rates to 5% to 5.25%.

With this hike, the federal funds rate would be at the highest level since 2007.

Let’s take a look at what we can learn from the Fed’s latest meeting, and what this would mean for us as savers and investors. 

What we learnt from the Fed’s latest meeting

#1 – Potential pause in rate hikes 

While the 0.25% rate hike was largely expected, investors were looking out closely for signs on whether this could be the last of the Fed’s rate hikes. 

The good news is that the US Federal Reserve hinted at a pause in the aggressive rate hikes.

In its latest statement, the Fed took out a line from the previous statement in March that said that the committee “anticipates that some additional policy firming may be appropriate”.

This was read by some investors to mean that we will not see any further tightening by the Fed. 

That said, Fed Chairman Jerome Powell did not commit fully to a pause during the press conference. 

When asked about whether we will see a pause, his reply was that “So we’ll be driven by incoming data, meeting by meeting, and we’ll approach that question at the June meeting.”

In other words, the Fed’s next steps will still be driven by various economic data, particularly whether we continue to see a moderation in inflation. 

#2 – Powell thinks it might be too soon to cut rates

While the Fed has opened the doors to a pause in rate hikes, Powell suggested that the central bank was unlikely to cut rates this year.

This was because of the Fed’s assessment that inflation pressures continue to be very high, and as such it may not be appropriate for rates to be brought down so quickly. 

Watch Jerome Powell's comments in the video below.

Despite Powell’s comments that rates may not be cut this year, investors continue to widely expect that we will start to see a cut as early as in July.

According to the CME FedWatch Tool, interest rate traders are expecting that there is a more than 50% probability that the Fed will bring down interest rates to 4.75%-5.00% in its July meeting.

These interest rate traders further expect that interest rates will continue to be brought down to 4.25% to 4.50% by the end of the year, representing a cut of 0.75% from current levels.   

#3 – Tighter credit conditions with banking sector stress

Apart from the Fed interest rate direction, many investors were also concerned about the ongoing stress in the banking sector.

Following the collapse of Silicon Valley Bank in March, we have seen the fallout spreading to other US regional banks.

This week, First Republic Bank was acquired by JPMorgan in a deal arranged by the government.

Shares of other US regional banking continued to plunge, with PacWest reportedly weighing a range of strategic options. 

In its statement, the Fed reiterated that “the US banking system is sound and resilient”.

Powell further mentioned that bank conditions have “broadly improved” since early March.

However, the strains in the banking sector “appear to be resulting in even tighter credit conditions”. 

These tighter credit conditions will in turn weigh on economic activity, hiring and inflation, and the extent of these effects remains “uncertain”.

What would Beansprout do?

With the expectation that the Fed might starting to pause on its rate hikes, we have seen government bond yields coming down in recent months.

For example, the 1-year Singapore government bond yield has declined to 3.58% in the latest auction on 20^th April. 

The interest rates on the Singapore Savings Bonds have also fallen, with the 1-year and 10-year return on the latest SSB declining to 2.81%. 

For investors who are looking to lock in interest rates, it might be worthwhile looking at the best fixed deposit rate before banks bring them down further.  We were still able to find 12-month fixed deposit rates of up to 3.75%, above the latest cut-off yield on the 1-year T-bill.

If you are looking at the best way to earn a higher interest rate on your savings, do check out our cash optimizer tool.

If you are wondering if it is still worthwhile to invest in the Singapore T-bill, our T-bill calculator will help you find out how much more interest you can potentially earn on your CPF savings by investing in the T-bill.

As Powell mentioned, the impact of the US banking sector stress remains uncertain, and this is something we will keep a close lookout for. 

As such, we will thread carefully around more risky investments, especially against the backdrop of a global economic slowdown. 

For example, while the falling bond yields could be positive for the Singapore REITs, we would need to make sure that the REITs are able to generate higher rental income from their properties to offset their higher interest cost. 

Learn more about how to choose the best REIT for your portfolio using our step-by-step guide.

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