The Fed Raising Rates: Should You Be Worried?
Federal Reserve Chairman Jerome Powell speaks during a news conference at the Federal Reserve Board building in Washington, July 27, 2022. (AP Photo/Manuel Balce Ceneta) Copyright 2022 The Associated Press. All Rights Reserved.
Cedric Tan, Vice President (Public Relations)
NUS Economics Society: Mid-battle against inflation, the Fed might raise the interest rates again.
In the effort to curb the rising inflation – currently at 6% - US Federal Reserve policymakers proposed to hike the Federal Reserve interest rate to above the median of 5.1% on the 16th of December (CNA, 2022).
However, investors were taken aback by the hawkish stance of the Fed as it was believed that the Fed will take a looser monetary policy in the face of declining inflation (CNA, 2022).
Despite the slowdown in the inflation trendline, Fed policymakers are still wary of the “strong labour market” which is a result of an emerging shortage of worker supply due to retirement, and a greater demand for labour as the pandemic eases (CNA, 2022). The combinations of these factors lead to an upward pressure on wages, contributing to the strong inflation in the US economy.
Traditionally, there is a trade-off between inflation and unemployment; a high inflation is typically seen with low unemployment, and vice versa. Choosing between the two evils, the Fed is willing to live with the predicted 4.6% increase in unemployment to keep inflation at bay (CNA, 2022).
Ultimately, it is a game of balance for the Fed – a tighter grip could easily lead to a recession whilst too little done would result in the current trend of inflation to persist. As of now, the slow growth experienced by the US economy can be easily tipped into a recession if an “unexpected shock” occurs (CNA, 2022).
With this current trajectory, interest rates are expected to remain high and rise in the future. One reason why the Fed continues to tighten interest rates, despite the potential recession, is because the Fed has yet to meet its target rates of 2%. Currently, inflation rates in December 2022 are at 6.5%, but have been decreasing since the middle of 2022 (Statistica, 2023). Therefore, rather than a predictive approach to counter inflation, the Fed adopting to hold off action to observe the economic and social climate is most sensible in this volatile circumstance to avoid an overtightening of the interest rates.
Sora, which is the volume-weighted average borrowing rate in Singapore’s unsecured overnight interbank cash market, has been administered by the MAS since 2005. PHOTO: CMG FILE
How does US rising interest rates affect Singapore?
You’d probably heard of the term the “impossible trinity” to describe a trilemma where a country cannot simultaneously control interest rates, exchange rates, and allow for free capital movement. As such, the best a country can do is to choose two and give up on the last one.
Singapore’s preferred mix of monetary policy as a small, open economy is to allow for free capital mobility and to manage the exchange rates, inevitably giving up the control of interest rates. As a result, Singapore’s interest rates are largely dependent on the actions of foreign countries, especially economic giants such as the US. Therefore, with the hike in US interest rates, we would expect to see our domestic interest rates move in tandem.
Starting from the middle of March, the Fed has been increasing the US interest rates 7 times from 0.25% - 0.50% up to 4.25% - 4.50% in December (Tepper, 2022). In the same period, similar movements can be observed with the Singapore Overnight Rate Average (SORA) which is the benchmark for the domestic interest rates. Currently, the 3-month SORA is at 3.11%, up from 0.23% in March (MAS, 2022).
This is good news for households who are savers but devastating to those who are borrowers; existing loans must be paid back with a higher interest which puts a greater strain on borrowers.
To make matters worse, in October, the core inflation rate in Singapore increased by 5.1 percentage points as compared to the previous year (Singstat, 2022). This would mean that the general prices of goods and services, excluding private transport and accommodation, have increased, eroding the purchasing power of consumers.
Borrowers are thus caught between a rock and a hard place – existing loans are made more costly due to the rising interest rates and spending becomes an issue with the inflationary pressures. Groups of individuals that would be most affected will be those seeking to buy housing, as housing experienced an increase in prices by 5.9 percentage points compared to the previous year (Singstat, 2022).
The Marriner S. Eccles Federal Reserve Board Building houses the main offices of the Board of Governors of the United States' Federal Reserve System (Federal Reserve, 2011). Flickr.
What will the future be?
As of now, the future is uncertain, with many major events happening simultaneously around the world. The significant and wide-scale nature of the impact of these events makes it hard to predict the resulting economic outcomes.
At this juncture, the economy seems to be stabilising with the winding down of the Covid-19 virus. However, the situation might easily change with the reopening of China, given a potential resurgence of the virus might be in the picture (CNBC, 2022).
The best we can do now is to brace for a bumpy and potentially long road ahead. With time and through combined international effort, the economy will optimistically adjust back to the optimum level of inflation and growth rates. We simply need to believe in the light at the end of the tunnel.
Bibliography
Fed may push rates higher, keep them there longer, policymakers say. (2022, December 17). CNA. https://www.channelnewsasia.com/business/fed-may-push-rates-higher-keep-them-there-longer-policymakers-say-3151661
Jacob, C. (2022, December 15). China’s reopening brings both risks and opportunities, Asian Development Bank says. CNBC. https://www.cnbc.com/2022/12/15/china-reopening-brings-both-risks-and-opportunities-adb.html
Monetary Authority of Singapore. (2022, December 30). Singapore Overnight Rate Average (SORA) Table. https://eservices.mas.gov.sg/statistics/dir/DomesticInterestRates.aspx
Singapore Department of Statistics. (2022, November 23). SINGAPORE CONSUMER PRICE INDEX. https://www.singstat.gov.sg/-/media/files/news/cpioct2022.ashx
Statistica. (2023, January 13). Monthly 12-month inflation rate in the United States from January 2020 to December 2022. https://www.statista.com/statistics/273418/unadjusted-monthly-inflation-rate-in-the-us/
Tepper, T. (2022, December 14). Federal Funds Rate History 1990 to 2022. Forbes. https://www.forbes.com/advisor/investing/fed-funds-rate-history/#:~:text=The%20first%20rate%20increase%20was,to%20arrive%2C%20in%20December%202016.