Why It Matters

Guessing game over Fed rate hike

The global guessing game over when interest rates will rise in the United States remains perplexing after a series of mixed signals from around the world.

New US employment numbers, still-low US inflation and China's slowing growth have all left economists and pundits as divided today as they have ever been. Will rates start going up this month or next, December or next year? That's anyone's guess.

But the consensus is that the Federal Reserve is not likely to lift rates very far, very fast to avoid jeopardising the recovery of the biggest economy.

If anything, the severity of the recent sell-off in global equities only exemplifies the Fed's concerns about overvaluations caused by an extended period of zero rates. It also underscores the urgency of normalising rates to reduce distortions that raise the likelihood of more severe market turmoil in future.

Some observers believe it is US domestic developments, and not the slowdown in China or events in Europe, that carry the most weight.

Take the latest job data released last Friday. While US non-farm payrolls missed forecasts, the unemployment rate fell more than expected to 5.1 per cent and wage growth was faster than estimated.

This supports the case for interest rate normalisation and so fanned rather than doused expectations of a rate hike sooner rather than later.

There are those who see the Fed delaying the rate hike to December because of market volatility, the mixed US employment outlook and Chinese risks. These concerns have hit currency forecasts.

The Singdollar weakened to fresh six-year lows of $1.4277 yesterday, with bets rising that the Monetary Authority of Singapore may ease policy next month, especially if currency volatility spikes further after the US Federal Open Market Committee meeting.

What this means is more volatile Singapore interest rates in coming months. The three-month swap offer rate, used to price commercial loans, has more than tripled to a year high of 1.55883 per cent since January. The three-month Singapore interbank offered rate, which prices home loans, rose to 1.07408 per cent last Friday, up from 1 per cent a week ago.

Home owners and businesses should brace themselves for higher interest rate payments ahead.

A version of this article appeared in the print edition of The Straits Times on September 08, 2015, with the headline 'Guessing game over Fed rate hike'. Print Edition | Subscribe