Fed raises rates by 25 bps to 3.75-4% in first hike since 2023, signals more to come

The US Federal Reserve raised its benchmark rate by 25 basis points to 3.75-4 per cent on Sep 16, its first increase since 2023, citing stubborn inflation. Analysts are split on whether further hikes will follow, with implications for Asian currencies and Singapore mortgage rates.

SINGAPORE: The US Federal Reserve has raised its benchmark interest rate by 25 basis points to between 3.75 and 4 per cent, its first increase since 2023, as it battles inflation that remains above target. The Federal Open Market Committee (FOMC) voted unanimously on Sep 16, marking a sharp turnaround from expectations earlier this year when markets broadly expected the central bank to hold rates.

The move has implications well beyond the United States. Higher US rates can strengthen the dollar, pressure Asian currencies and financial markets, and influence central bank decisions across the region. The US dollar rose to a seven-week high following the decision as markets repriced policy expectations.

"What's changed is Chair Warsh's leadership in being more proactive in taking action to bring inflation back to target," said Tan Hui, Asia Pacific chief market strategist at JP Morgan Asset Management. Inflation, measured using the personal consumption expenditures price index, has remained above the Fed's 2 per cent target for more than five years. The August Consumer Price Index, released last week, came in at 3.4 per cent.

For Asia, one of the most immediate consequences could come through currencies. "(Warsh) definitely sounded more hawkish than expected, and the fact that he provided guidance on future hikes surprised the markets, causing them to reprice policy higher, which ultimately pushed the dollar higher," said Carol Kong, currency strategist at Commonwealth Bank of Australia. A stronger dollar can make dollar-priced imports more expensive for Asian economies and tighten financial conditions for companies and governments with dollar-denominated debt.

For Singapore homeowners, a Fed hike does not translate immediately into higher mortgage repayments. Many floating-rate home loans here are pegged to the Singapore Overnight Rate Average (SORA), which reflects the cost of borrowing Singapore dollars overnight between banks, rather than the Fed's policy rate. Changes in market rates may take time to filter through to mortgage repayments.

Analysts are divided on whether more hikes will follow. Macquarie Group's head of economics David Doyle expects 50 basis points in further hikes, with 25 basis points likely in December and the first quarter of 2027. Mark Cabana, co-head of global rates research at Bank of America Securities, also sees further tightening in October and December. However, OCBC Group Research's head of FX and rates strategy Frances Cheung said she does not expect an aggressive hiking cycle, noting that current interest rate levels are "somewhat restrictive" in cooling inflation.

President Donald Trump on Wednesday delivered his most pointed criticism yet of Chair Warsh and the FOMC, writing on Truth Social that "interest rates in the United States should be 1 per cent, or less" and calling for lower rates "fast". BofA Securities' Cabana said the decision to raise rates is a "big, independent stamp of approval" for the Fed, underscoring its operational independence in setting monetary policy. "Even though the president might want rates lower right now, the Fed's job is to get inflation under control, and then it can consider making that happen," he said.