Last week, during its September 2024 meeting, the U.S. Federal Reserve made its first interest rate cut in four years, reducing the federal funds rate by 50 basis points to a range of 4.75% to 5.0%. This move marks a significant shift in monetary policy after years of rate hikes designed to control inflation. By lowering rates, the Fed signs concerns over slowing economic growth while aiming to maintain price stability.
The federal funds rate is a reference point for many other interest rates globally, including those affecting Singapore. As a result, Singaporeans may experience several indirect effects from this decision. Here are four key ways this could impact Singaporeans.
#1 Impact on the Exchange Rate (USD/SGD)
When the Federal Reserve lowers interest rates, returns on USD-denominated assets, such as U.S. Treasury bills and corporate bonds, become less attractive to foreign investors. This can lead to capital outflows as investors seek better yields elsewhere, potentially weakening the USD relative to the SGD. With its stable currency, Singapore may attract more capital in this scenario.
The interest rate differential between currencies influences foreign exchange rates. If U.S. interest rates fall while Singapore’s rates remain steady, the gap in yields could favour the SGD, strengthening it against the USD. This shift makes borrowing in USD cheaper but increases the attractiveness of SGD-denominated assets.
For Singaporeans holding USD investments, such as U.S. stocks or bonds, a weaker USD could erode their returns when converting back to SGD, even if the value of the investments rises. However, a stronger SGD also makes imports from the U.S. more affordable, benefiting Singaporeans when it comes to travel, education or purchasing U.S. goods.
#2 Cheaper Borrowing Costs
Although Singapore’s interest rates are influenced primarily by its domestic policies and the Singapore Overnight Rate Average (SORA), global trends, including U.S. rate cuts, could indirectly lower local borrowing costs. A lower interest rate will directly impact property mortgages in Singapore by reducing borrowing costs for both new buyers and existing homeowners.
New buyers: Lower interest rates usually mean banks reduce their mortgage rates, making it cheaper for first-time homebuyers to secure loans. With reduced monthly payments, homeownership becomes more affordable and less financially strained.
Existing homeowners: Homeowners with existing mortgages can benefit by refinancing at a lower rate. Refinancing allows them to reduce their monthly payments, ultimately saving on total interest costs over the life of the loan, freeing up more disposable income for other uses.
#3 Lower Returns On Fixed Income Instruments Such As Bonds, Money Market Funds & Deposits
As the U.S. lowers interest rates, companies issuing bonds or banks offering fixed deposits may no longer need to provide high yields to attract investors. This can reduce interest rates on fixed-income instruments such as bonds, money market funds, and deposits, making these assets less appealing.
This can translate into lower returns for Singaporeans who rely on interest-bearing accounts or bonds for income. As a result, savers might need to explore alternative investment options to maintain or grow their wealth in a low-interest-rate environment.
#4 Equities, Especially Dividend-Paying Stocks, Become More Attractive
With fixed-income products like bonds offering lower yields, investors may turn to dividend-paying stocks as a more attractive investment. Dividend stocks provide regular payouts and often offer higher yields compared to bonds and savings accounts in a low-interest-rate setting.
Additionally, dividend-paying stocks present the opportunity for capital appreciation. Companies benefit from cheaper borrowing costs, so they may reinvest in their operations, leading to higher profitability and rising stock prices. This makes dividend stocks appealing for both income generation and potential capital gains, especially in a low-interest-rate environment.
Read Also: 4 Sectors In Singapore That Will Benefit The Most From The US Fed Rate Cut
While the U.S. Federal Reserve’s interest rate cut primarily focuses on the U.S. economy, its effects can ripple across global markets, including Singapore. Singaporeans could benefit from cheaper borrowing and potential investment gains but may face weaker returns on savings and foreign exchange challenges.
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