SINGAPORE, Nov 4 — In delivering its fourth straight steep interest rate hike on Thursday (Nov 3) to quell inflation, the United States Federal Reserve (Fed) signalled that it could slow down the pace of future rate hikes.

The US central bank's chair Jerome Powell said this could happen as soon as in December or January, indicating that future rate hikes may be smaller.

The latest hike of 0.75 percentage points brings the Fed’s benchmark rate to a range of 3.75 to 4 per cent — its highest level since 2008 — from nearly zero in March.

While the hike was in line with economists' expectations, the stock market still sold off after Mr Powell said that the Fed still has "some ways to go” in its policy cycle, adding that it was premature to think about a pause as rates could peak at higher levels than previously thought.

Economists told TODAY on Thursday that households here would have to deal with even higher mortgage payments or car loans in the future and businesses having to pay higher borrowing costs, even as the pace of increases slow.

TODAY takes a look at what the Fed’s new phase in its effort to control inflation means and the implications for Singapore.

What does this mean?

The Fed has had to raise interest rates aggressively over the past months because it was too late in introducing rate hikes to quell inflation, said Mr Song Seng Wun, an economist at CIMB private banking.

Despite the last few rounds of steep rate hikes, inflation rates in the US are still well above the Fed’s target of around 2 per cent, falling slightly to 8.2 per cent in September from its 40-year high of 9.1 per cent in June.

So on Thursday, despite signalling a future slowdown in rate hikes, Mr Powell made clear that he was prepared to push rates as high as needed to stamp out inflation.

"We still have some ways to go. Incoming data from our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” he said.

From the previous Fed meeting in September, economic projections had placed the peak Fed rate at 4.75 per cent, DBS Bank’s senior rates strategist Eugene Leow said in a note to investors.

The bank is expecting another hike of 50 basis points, or 0.5 percentage points, in December, followed by further hikes in the first quarter of next year totalling another 50 basis points.

"That would take the Fed funds rate to 5 per cent — a sufficiently restrictive level, in our view — where a pause would probably be warranted,” he wrote.

Why the shift?

In a statement released by the Fed committee before Mr Powell delivered his remarks, it said that it will "take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”.

Mr Song said that this suggests that the Fed is worried about how the cumulative effect of the steep interest rate hikes over a short period of time will hurt the economy.

"Having too many hikes for too long may have an outsize aggregate impact on economic activity and trigger recessions,” he said.

He added that there is typically a time lag between rate hikes and the impact on the economy as mortgages and loans begin to cost more and people start to cut back on consumption.

Why did the stock market dive?

The S&P 500 index closed 2.5 per cent lower on Wednesday evening in the US (Thursday, Singapore time), its worst rout on a Fed decision day since January 2021, according to Bloomberg.

The Straits Times Index (STI) here closed 1.47 per cent lower on Thursday.

Why did investors react negatively to the Fed announcement even though the 75 basis point hike was in line with expectations?

Ms Selena Ling, head of treasury and research at OCBC bank, said that market players were not hoping to hear that the Fed was far from done with rate hikes.

The earlier statement that referred to cumulative and lag effects of policy tightening had sent the financial market into an initial state of euphoria, she said. But that quickly unwound when Mr Powell warned that the terminal rate would have to be higher than initially expected.

"The net effect was actually more hawkish than expected,” she said.

What are the implications?

Although Singapore's central bank doesn't set interest rates and uses the exchange rate as its only form of monetary policy, borrowing rates here are heavily influenced by global trends, especially from the US.

Ms Ling said that in Singapore, interest rates still have upside, meaning that mortgage loan rates will continue to rise.

Mr Terence Wong, founder and chief executive of fund management firm Azure Capital, added: "Even if the pace slows down, the fact is that the rates are still rising."

DBS Bank’s senior economist Irvin Seah warned that Singaporeans need to understand that higher interest rates are here to stay and could continue to go up in the coming months.

"They need to be more prudent on the financing of big ticket items, such as property and cars,” he told TODAY.

On the other hand, investors could stand to gain from more attractive interest rates on fixed deposits with banks, said Mr Wong.

As for the stock market, he said that market players always look out for how fast rates are rising and will see it as a positive sign when rates are slowing.

But there is little upside because the market has already baked in the expectation that the Fed will slow down the pace of rate hikes, he added.

"If midway through (the future price hikes), the Fed comes out with more hawkish comments, saying for example that inflation is still very sticky, then the markets will take a tumble,” he said.

"People read a lot into the language of the Fed and I think ultimately, you’ll see very wild gyrations in the market as we find a certain footing and see if the rate hikes have slowed.” — TODAY