How the US Fed Rate Hikes Will Affect You in 2022

The US Federal Reserve is expected to raise interest rates this year, with some pundits expecting as many as seven hikes. Why must these rate hikes be carried out, and how will they affect the everyday Singaporean?  

At the moment, the talk on Wall Street is undoubtedly all about the US Federal Reserve’s (Fed) recently announced plans to start tapering its bond purchases and hike up interest rates. 

This is causing some panic in the stock markets, as the move signals an end to the ‘free money’ that the US economy had become addicted to as it limps through the havoc wrought by the COVID-19 pandemic.

Given Singapore’s heavy reliance on global trade, and the US Dollar’s status as the world’s reserve currency, the waves created by the Fed’s actions will surely reach our shores. 

The question is what type effects can we expect to see, and what measures could we take to stave off the worst of it? 

What is the US Fed Rate?

Let’s start things off with some background.

The term ‘US Fed Rate’ refers to the United States Federal Reserve interest rate. This rate is reviewed eight times a year by the Federal Open Market Committee. It is to be followed - or at least referenced - by banks in the US when they make loans to individuals, businesses and each other

The US Fed Rate is an important economic lever that the US uses to - for lack of a better - word ‘shepherd’ its economy. 

It’s actually pretty simple in how it works. When the US wishes to stimulate its economy, the Federal Reserve reduces its rate. This results in the availability of low-interest loans (think cheaper debt) which encourages consumers, businesses and other parties to borrow money for spending, housing, expansion and other purposes. 

More money being spent means there’s more money circulating in the population. This has the effect of stimulating the economy, which brings about changes such as creating more jobs, increasing earnings and other developments that are generally considered positive.  

On the flipside, raising the US Fed Rate makes debt more expensive, which has a dampening effect on the economy. Borrowers become less willing to take out loans, and over-leveraged parties may even become unable to repay their loans, which leads to other problems down the line. 

So why would the Fed do it? In a word: inflation.

Flooding the economy with money via low interest rates can lead to inflation, as there are more dollars chasing the same amount of goods, products and services, causing prices to go up. 

Inflation is why that bowl of wanton noodles that used to cost S$2 now costs S$3 - that’s a 50% increase. Over time, inflation erodes the spending power of your money, which is never a good thing! 

In order to remain healthy and robust, a nation’s economy needs to keep inflation within a narrow band. It’s a delicate balancing act, controlled by raising and lowering interest rates at the right time, and by the right amount. 

Hence, whenever inflation gets too high, the Fed raises interest rates in an attempt to cool things down.

Why is the US cutting interest rates now?

Due to the COVID-19 pandemic, the US has been experiencing record levels of inflation for 2020 and 2021 as the Federal Reserve embarked on an unprecedented spree of ‘money printing’.

(It’s not as nefarious as it sounds. In effect, the Federal Reserve is empowered by law to control the money supply so as to maintain favourable economic conditions. 

In order to combat the economic slowdown caused by the pandemic, the Fed started buying up government and commercial bonds. 

The bond issuers then take the money received from the Fed and spend it in various ways, such as pandemic relief programmes, stimulus checks, business expansion, hiring more workers, etc.

In this way, newly created money gets injected into the economy and put into the hands of the people, allowing them to keep spending and to keep the economy going.)

For 2021, the US’ Consumer Price Index (a commonly used indicator of inflation) surged to 7%, a 40-year high. That’s neither desirable nor sustainable.

Surprisingly, the unemployment rate in the US dropped to 3.9% by the end of 2021, a level that is below the Fed’s prior expectations.

Another, ancillary reason could be that initial fears of the impact of the Omicron variant seems to be fading, as disease severity seems to be milder than expected. 

Due to these factors, the Fed has decided to (finally) start tackling the problem. It has announced cuts to its bond buying programme, and will be introducing up to three (some say six or seven, even) interest rate hikes this year. 

Here’s how you may be affected by the US Fed Rate hikes

Stock investors - short- to mid-term volatility 

Investors in the US stock market endured a lacklustre start to 2022, as the market fell due to fears of the US Fed’s imminent actions. 

Popular market indices such as NASDAQ and S&P 500 turned a lurid red as investors started selling off their holdings in favour of safer havens. Even high growth technology stocks took a beating, as can be seen in the dismal price action of the beloved Ark Innovation ETF (ARKK).

The silver (and gold) lining here? Precious metals seem to be proving their worth as a hedge against rocky markets, with gold prices reaching a two-month high. Meanwhile silver futures achieved its highest finish since November.  

While the corrections in the equities markets may seem to lend credence to those who hold a cautious outlook for 2022, others are nonetheless bullish. This decidedly mixed outlook indicates a high level of uncertainty, and investors should expect some degree of market volatility in the short to medium term.

Accordingly, rotating out of positions, or entering new ones should be embarked on with greater caution. Choosing to ride out the volatility and holding off on making moves until clarity returns may prove astute, especially for those investors who have poor risk appetite. 

Homeowners - uptick in bank mortgage rates

Bank mortgages are loans taken out for the purposes of purchasing a property. 

With the Fed expected to raise interest rates, banks and lenders in the US have already started preemptively raising mortgage rates. According to a CNBC article, “30-year fixed-rate home mortgage has already risen to 3.24%, and is likely to climb to near 4% by the end of 2022.”

Over here in Singapore, we could see a similar rise in home mortgage rates offered by our local banks. This is because Singapore’s interest rates are, at least, partially influenced by the US Dollar, given the country’s status as an important trade partner.

Hence, if you’re servicing a bank mortgage, you should be on the lookout for opportunities to lock in any favourable rates that you may find. Doing so will create a runway to prepare your finances to cope with increases in the future.   

Workers and employees - tighter employment market and more demanding work environment

When the US Fed increases its interest rates, businesses and corporations react by hunkering down and taking a more cautious approach. 

Expansion plans get halted or shelved, headcounts and wages get frozen, marketing and advertising budgets get slashed, and other cost-saving measures are implemented. Particularly beleaguered corporations may even reduce their headcounts, leading to jobs lost. 

This is because businesses often rely on borrowed money to continue funding their expansion and growth. 

When interest rates are raised, the cost of debt is increased - i.e., it costs more to borrow money. Additionally, higher-interest debt also means that debt repayment amounts are heightened, which further adds to cost pressures.  

In turn, this could impact employees and workers negatively, who may face lesser job opportunities with poorer benefits, or be put into a more demanding work environment as companies attempt to do more with less in order to try and stay ahead.

This also extends to entrepreneurs, freelancers and the self-employed. In fact, these groups of workers may more keenly feel the negative effects of business cutbacks in response to the interest rate hikes. 

Perhaps the important thing to consider here is this: if you’ve been meaning to switch jobs, step up your job search so you can entrench yourself as quickly as possible in your new role. 

Otherwise, think about how you can increase your visibility and value at work, just in case your company hits a stormy patch.  

Looking ahead…

It seems the US Fed Rate hikes may bring some challenges to our sunny shores, so it’d be a good idea to pay closer attention to the business and news headlines for the time being.  

Provided the Fed follows through with its announcements, and stays the course, 2022 may turn out to be a year marred by corrections and upheavals in the stock markets and elsewhere. It may even mark the start of a global recession.

What’s important to remember, however, is that as an open and well-established economic hub, Singapore is relatively resilient to the events happening in the United States. While we may not  fully escape the fallout, we also aren’t directly in the line of fire. 

In case you’re feeling disheartened, bear in mind that while bull markets make you money, bear markets make you rich. It may be worthwhile keeping an eye on the markets for the right opportunities to plant the seeds of future success. 

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