Fed holds interest rates for the fifth time, three dissenters call for more: What the July 29 decision means for Switzerland

The US Federal Reserve is once again leaving its key interest rate at 3.50 to 3.75 percent, but for the first time three members openly voted against it. Why the CHF swap curve is falling despite hawkish signals from Washington, and why Raiffeisen expects little movement for Swiss mortgages.

On Wednesday, the US Federal Reserve kept its key interest rate in the range of 3.50 to 3.75 percent for the fifth time in a row. The ongoing conflict in the Middle East continues to cloud the inflation outlook. This time, the real news is not in the communiqué, but in the voting results. The decision came in at nine to three, with the presidents of the Cleveland, Minneapolis and Dallas district banks, Beth Hammack, Neel Kashkari and Lorie Logan, voting for a quarter-point increase. After the unanimous June decision, which we reported on six weeks ago, unity is crumbling.

A chairman who remains silent, and a committee in dispute

Federal Reserve Chairman Kevin Warsh is sticking to his line. The statement was once again extremely concise and almost identical to the one from June. There were no indications about the future rate path, even though most markets expect an increase in September. Warsh argues that the Fed should talk less about what it will do, and instead emphasize the conditions under which it would act. But the statement on Wednesday delivered neither one nor the other.

On substance, however, Warsh maintained a hawkish stance. He emphasized that there is no soft inflation target and the Federal Reserve will not hesitate to fight inflation should prices continue to rise. At the same time, he pointed out that tension in financial markets is doing part of the Fed's job. The uncertainty before the decision was accordingly high: futures markets were pricing in a roughly one-third chance of a surprise hike.

The markets react divided

Wall Street reacted harshly. The Dow Jones lost more than 840 points or 1.6 percent at times. The yield on ten-year US Treasuries rose by 5 basis points to 4.657 percent, the thirty-year jumped more than 9 basis points above the 5.1 percent mark, while the two-year yield fell. So the market reads the decision as: no hike in the short term, but even greater inflation risk in the long term. Regarding September, bets were readjusted. According to CME's FedWatch tool, the probability of rates staying unchanged in September rose to just under 42 percent, up from 24 percent the previous day. A hike remains the more likely scenario, but it is no longer a given.

And Switzerland? The pendulum swings back

Anyone following our central bank series knows the pattern by now. In June, the 10-year CHF swap stood at 0.575 percent thanks to hopes for peace in the Gulf; at the time, we called this relief borrowed. Up to the ECB decision last week, the escalation brought the premium back, and the rate rose to 0.7725 percent. Today it stands at 0.6925 percent, about 8 basis points lower than a week ago. The reason, again, is the oil market: crude oil prices fell at the start of Fed week but are still more than 20 percent up in July. Swiss capital market rates remain a plaything between the Gulf and central banks, and the pendulum is currently swinging on a weekly rhythm.

The banks' assessment: Little movement expected

Raiffeisen's newly published interest rate forecast sounds remarkably relaxed. The bank notes that the loss of energy supply is significantly less than originally feared and that underlying price dynamics in Switzerland have barely changed so far. Accordingly, the SNB is not worried about inflation, seeing its main risk in global demand and the exchange rate. With expected interest rate differences widening versus the eurozone and the US, the franc has actually lost some value, so there is currently no acute need to intervene in the currency market. The conclusion of the Raiffeisen economists: The National Bank sees itself well-positioned with its zero rate, which points to unchanged SARON conditions and little movement in long-term interest rates.

What does this mean for mortgage borrowers?

For SARON mortgages, the usual applies: the SNB is decisive, its key interest rate is at 0 percent, the SARON continues to be slightly negative. The debate in Washington does not change this.

For fixed-rate mortgages, the window has opened slightly again compared to the previous week. The decline of the 10-year swap by around 8 basis points lowers the cost of a new ten-year fixed-rate mortgage of 800,000 francs by about 640 francs per year compared to last week's conditions. However, more important than trying to land the perfect day to close is the lesson of recent weeks: as long as the Gulf conflict smolders and the Fed navigates without guidance, rates can move by 10 to 20 basis points in a matter of days, in either direction. Anyone planning a refinancing gets more flexibility by obtaining simultaneous offers from several providers, allowing them to actually use a favorable time window.

Outlook: Jackson Hole is the next key point

The central banks' summer break is short. At the end of August, Warsh will speak at the Jackson Hole Symposium; his appearance will be closely watched with regard to the Fed's future communication. The next rate decision will follow on September 16. Shortly afterwards, the ECB and SNB will also be making their moves again. Until then, what these weeks have taught remains true: The direction of capital market rates is currently determined less in the boardrooms of central banks than on the oil market.

Sources:

• CNBC: Divided Fed holds interest rates steady
• CNN Business: Two key takeaways from the Fed's unusually unpredictable meeting
• Fox Business: July FOMC: Fed holds interest rates steady
• Yahoo Finance: Warsh gets the 'good family fight' he asked for
• Kiplinger: July Fed Meeting: Updates and Commentary
• Raiffeisen: Current interest rate forecast "SNB remains in good position"
• hypothek.ch: Current swap rates