Fed likely to end QE this year: Minutes

[CityFarmer]

"WASHINGTON - The United States Federal Reserve will probably end its US$85-billion (S$105-billion) monthly bond purchases this year, minutes from the central bank's December meeting released on Thursday showed, signalling an end to historically low interest rates.

In a surprise to Wall Street, the minutes showed a growing reticence about further increases in the Fed's US$2.9-trillion balance sheet, which it expanded sharply in response to the financial crisis and recession of 2007-2009." - TODAYonline

http://www.todayonline.com/Business/EDC1...r--Minutes

Will this signal the end of property boom in the region, including Singapore (with raising of interest rate)?

[Musicwhiz]

Will this signal the end of property boom in the region, including Singapore (with raising of interest rate)?

I read this piece of news with interest - it appears the USA is actually aware that their never-ending money-printing may create more problems than it seeks to solve. What they need is a good dose of austerity, spending cuts and higher taxes on the rich.

As for interest rates, I doubt they will go up anytime soon; and even if they do, it would be very gradual. Unless, of course, inflation rears its ugly head in USA much earlier than expected which may prompt the Fed to be more aggressive.

Even then, I do not think that the knock-on effect would be higher interest rates in Singapore. And property still seems very resilient while unemployment rate hovers near an all-time low. So even if rates go up, investors would still be able to service their loans and thus there would be no correction/crash.

It would be good to hear other views.

[corydorus]

I think the day when exporters stop talking about USA as the main or top export market, is the day of reckoning for USD.
Interest rate will shoot up quickly.

[weijian]

I do agree with Musicwhiz that interest rates are NOT going up soon, as Fed has pledged these low rates as long as forecasted inflation and/or unemployment rates do not cross certain threshold targets. However, the end of QE and the start of unwinding it (selling out of their bond purchases) should reduce the availability of liquidity on the market and that will definitely put a damper on all assets (equities or real estate alike). However on the other hand, the end of QE may also signal that the Fed has a more favorable view of the economic future. Will such animal spirits kick start the next bull?

Nonetheless, we must understand that the current 2.9trillion balance sheet will expand to ~4trillion by end 2013. Maybe the risk is whether the Fed will be able to suck this liquidity out from the market in an orderly manner as they want to?

[specuvestor]

Even pundits forget there is a difference between equity and fixed income. The latter has a maturity date.

Fed just need to do nothing and let the bonds mature. That is actually quite orderly (though it does impact the monetary base but spread over longer periods than markets can remember) unless the government defaults. That's not the same thing as getting out of AIG, for eg.

SGD interest rate is actually quite correlated to the relative strength vs the basket of currencies. For example if regional currencies strengthen against USD AND there is demand for SGD, then interest rate is low. However if regional currencies strengthen but for other reasons there is little demand for SGD, then interest rate have to go up so as to strengthen the currency and maintain the NEER with the basket.

In this case if US interest rate going up because of growth recovery, then demand may go to USD and interest rate may go up in Singapore, depending how much the regional currencies move vs SGD. Hence ceteris paribas if RMB appreciates, it will cause upward pressure to our rates as SGD tries to catch up with the appreciation. (disclaimer: this is unlikely to be taught in econs/ finance 101 which doesn't believe/ assume currency control)

However if US interest rate goes up due to inflation fighting, that may have little impact on our interest rate, as our management of inflation is from exchange rate, not interest rate, as we import for consumption and re-export. Purchasing power for other countries' goods and services is more important for our inflation than the cost of money.

[mrEngineer]

My theory is that US plans to go into higher inflation so that it can raise asset prices which will help alot of Americans that are suffering with negative equity now. Interest rates to curb hyperinflation will come only later. However, like what specuvestor mentioned, our interest rates are highly dependent on the demand for SGD which I personally believe will dwindle down as Singapore are unable to create further value (through production or manufacturing etc). Hopefully the wealth that has flowed to Singapore will somehow retains here due to our favorable tax laws but once US is done with Switzerland, they will start to tackle Singapore and Hong Kong. And Singapore is a much easier case as our security may be largely dependent with US support.

[Temperament]

i know nuts about US or world economy but i think Singapore interest rate somehow or rather has been tracking or reflecting US interest rate quite closely, historically. Why? What is Malaysia interest rate now? Can someone explain why Singapore is like that?

[CityFarmer]

Even pundits forget there is a difference between equity and fixed income. The latter has a maturity date.

Fed just need to do nothing and let the bonds mature. That is actually quite orderly (though it does impact the monetary base but spread over longer periods than markets can remember) unless the government defaults. That's not the same thing as getting out of AIG, for eg.

SGD interest rate is actually quite correlated to the relative strength vs the basket of currencies. For example if regional currencies strengthen against USD AND there is demand for SGD, then interest rate is low. However if regional currencies strengthen but for other reasons there is little demand for SGD, then interest rate have to go up so as to strengthen the currency and maintain the NEER with the basket.

In this case if US interest rate going up because of growth recovery, then demand may go to USD and interest rate may go up in Singapore, depending how much the regional currencies move vs SGD. Hence ceteris paribas if RMB appreciates, it will cause upward pressure to our rates as SGD tries to catch up with the appreciation. (disclaimer: this is unlikely to be taught in econs/ finance 101 which doesn't believe/ assume currency control)

However if US interest rate goes up due to inflation fighting, that may have little impact on our interest rate, as our management of inflation is from exchange rate, not interest rate, as we import for consumption and re-export. Purchasing power for other countries' goods and services is more important for our inflation than the cost of money.

A very informative posting. Thanks. Learn new stuff today

[corydorus]

I thought many of our loans are kind of indirectly related to US rate. If US rate goes up, so will we despite Singapore uses exchange rates to manage currency strength. I could be wrong.

[CityFarmer]

i know nuts about US or world economy but i think Singapore interest rate somehow or rather has been tracking or reflecting US interest rate quite closely, historically. Why? What is Malaysia interest rate now? Can someone explain why Singapore is like that?

Base on previous info from Court Asia prospectus, the Malaysia interest rate is much higher than Singapore

IIRC, it was 5-6% Malaysia versus 1-2% Singapore

It is interesting to dig out more for the mechanism of interest rate in Singapore. Hmm...next research topic...