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Fed signals more rate hikes to come. Here’s what to do as interest rates surge.

03 Nov 2022

The Fed raised interest rates by 0.75 percentage point (0.75%) as expected, and signaled that we might see higher peak interest rates.

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What happened?

The talk of the town in the past few months has been around interest rates. 

We’ve seen the interest rates for Treasury bills, Singapore Savings Bonds, Deposit accounts, Fixed deposit all go up to multi-year highs.

And of course our mortgage rates have gone up as well.

This is why everyone was looking closely at what the US Federal Reserve (Fed) would do in its latest meeting to determine if interest rates would go up further.

True enough, the Fed announced that it will raise the benchmark interest rates by 0.75 percentage point (0.75%). 

Let’s take a look at what the latest Fed rate hike would mean for you as an investor. 

What does this mean?

The interest rate hike was widely expected by many investors, especially after the red-hot inflation numbers that came out earlier. 

However, what surprised investors was what Fed Chairman Jerome Powell said at the news conference. 

This is summed up very well by Nick Timiraos, the Chief economic correspondent from the Wall Street Journal, who is also known for his insights on the Fed.

In his view, the 3 key takeaways are:

  • The Fed could step down to a slower pace in Dec even if inflation data don’t improve much
  • If there had been new estimates of the terminal funds rate released today, they would have moved up
  • Not ready to talk about a pause

Let’s dig deeper into what each of these mean.

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Source: Twitter

#1 – Pace of increase may slow down

Firstly, here’s the good news. 

The pace of interest rate increase is expected to slow down after the significant increases we’ve seen over the past few months.

The Fed has raised interest rates consecutively by 0.75% each time. This would bring the current target interest rate to 3.75-4.00%. 

The majority of economists expect that there will be another 0.75% increase in the next meeting in December. This would bring the target interest rate to 4.50-4.75%.

However, the pace of interest rate hikes is expected to slow down going into 2023. Economists are expecting that interest rates could go up by just another 0.25% next year and stay there throughout. 

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Source: CME (as of 25 October morning Singapore time)

#2 – Interest rates may get higher before they come down

Here’s the bad news – interest rates will end up higher even if they are not going to be raised significantly from here. 

Based on the Fed’s’ interest rate projections in September, interest rates were expected to peak at 4.50-4.75%. 

What Jerome Powell has just signaled, is that the peak interest rates could end up above these levels. 

Currently, economists largely expect that the peak interest rate would be in the range of 4.75-5.00%.

However, there is a likelihood that interest rates could reach levels above 5%, and stay there for a period of time. 

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#3 – No pivot for now

Putting it all together, the Fed is not changing its direction on its tightening for now. 

Some investors were expecting the Fed to pivot and reverse the course of its aggressive interest rate hikes, but it seems like that is not going to happen anytime soon.

Jerome Powell took effort to drive in this message by saying that “It is very premature to be thinking talk about pausing…very premature.”

What would Beansprout do?

The higher interest rates might be good news to some investors with spare cash to allocate.

After all, the interest rates for 6- month Singapore T-bill has gone up to 4.19% in the last auction. 

The interest rate on the SSB has also gone up to record high with a 10-year average interest rate of 3.47%

You might even be able to earn an interest rate of up to 7.65% for your deposit account

Find out how we’d allocate our money in our simulated portfolio.

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