Every home owner who cares about how much monthly installment and interest they pay should be interested to know, what moves interest rates? Specifically, what determines the home loan rates here in Singapore? It is often said in news articles that Singapore rates track the United States Federal Reserve rate. That almost seem like too easy an answer. Fine. The obvious question to ask next – so what moves the Federal Reserve rate?
In their own words, the Federal Reserve states that they are the central bank of the United States, with duties to
- conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment,
stable prices, and moderate long-term interest rates
- supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
- maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
- providing financial services to depository institutions, the U.S. government,
and foreign official institutions, including playing a major role in operating the nation’s payments system
One of the primary tools they use to fulfill these duties is to suggest what the overnight inter-bank lending rate (commonly known as the Federal Funds rate) should be. The whole world watches and anticipates the outcome of the Federal Open Market Committee (FOMC) meetings which reports their conclusions on the Federal Funds rates. The meeting calendars are published here. In between the dates of those meetings, the whole world watches what the FOMC members say. And they do say much.
A recent speech by an FOMC member managed to convince the market somewhat that the Fed rates is set to increase soon.
“Inflation is already too high and inconsistent with our goal of – and responsibility to ensure – price stability,” Plosser said in a speech to a group assembled by the Philadelphia Business Journal. “We will need to reverse course – the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later,” he warned. “And, I believe it will likely need to begin before either the labour market or the financial markets have completely turned around,” he added.
This insightful article, however, gives reasons why the Federal Reserve can’t raise interest rates just yet.
While it’s true that maintaining low interest rates will further fuel inflation, the Fed really has no choice. Or perhaps it’s a Hobson’s choice. You see, if the central bank actually raises rates to combat inflation, adjustable rates on mortgages will rise, setting in motion a whole new round of housing defaults, which will lead to an escalation of bank write-downs, which will torpedo stock prices, which will force institutional investors to liquidate holdings to raise capital. The same will happen out in the marketplace, where companies with debt coming due will find it impossible to refinance, touching off still another avenue of defaults, losses, and write-downs.
Interest rates will go up as this article explains.
at some point inflation fears rise to a level where aggressive rate hikes by the Fed are needed to bring about a REDUCTION in long-term interest rates.. even if the economy remains weak.
So do watch out for interest rates movements.