Fed pauses on rate hikes. Here’s what it means for T-bills and stocks

What happened?

The US Federal Reserve has kept its interest rates unchanged, pausing on the significant hikes we have seen over the past year. 

This would undoubtedly be a relief for many with the federal funds rate already 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 – Pause in rate hikes for now

For the first time since early 2022, the Fed has left interest rates unchanged.

As a result, the benchmark federal funds rate remains at 5% to 5.25%. 

#2 – Fed could resume on rate hikes again later

While the Fed has paused on its rate hikes for now, Fed Chairman Jerome Powell suggested that we might see another two more rate hikes this year. 

In fact, Powell shared that nearly all officials expect some further rate hikes. 

As a result, the median estimate of the Fed funds rate at the end of the year is at 5.6%, compared with 5.1% in the previous round of projections.

In fact, investors are now largely expecting that we will see another 0.25% increase in interest rates as soon as in the next meeting in July. 

Compared to previous expectations that we might start to see some rate cuts by the end of the year, investors are now forecasting that the earliest that we might see a rate cut will be in 2024.

What would Beansprout do?

There are a few key takeaways from the latest Fed meeting:

• We have a pause in interest rate hikes, for now
• Interest rates could stay high for the rest of the year
• Nevertheless, we are quite close to peak interest rates

With the Fed not expected to cut interest rates this year, we have seen US government bond yields remaining high. 

This has also led to decent yields on the Singapore T-bills, with the cut-off yield in the latest 6-month T-bill at 3.84% p.a. 

The yield on the T-bill also continues to be higher than fixed deposit rates, where the best  fixed deposit rates continue to be brought down.

Hence, it might still be worthwhile considering the T-bill as a way to earn a higher return on our savings in a safe way. 

With the expectation that we might be close to peak interest rates, we have seen a divergence in performance in the stock market. 

The US stock market has entered a bull market with the S&P 500 rising more than 20% from its October low. The tech-heavy Nasdaq index has risen more than 30% year-to-date. 

We would use a disciplined approach when investing and be wary about Fear of Missing Out (FOMO), especially with the strong gains in recent months. 

If you are looking to dollar-cost average into the US market, we share how to choose between the S&P 500 ETFs.

On the other hand, the share prices of Singapore banks have fallen in recent months on concerns that their net interest margins might be close to the peak. 

If you are a holder of Singapore banks or have them on your watchlist, we share what we’d be looking out for in the coming months. 

While the expectation that we are close to peak interest rates might lead to improved sentiment for 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.

If you are keen to learn more about how to position your portfolio and manage your personal wealth in the second half of the year, sign up for the iFast Mid-Year Review on 8 July 2023. 

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