Publication date: 5 January 2016 | Covering: December 2015
Monthly Briefing
- HISTORIC: Fed December 15–16 raises federal funds rate to 0.25–0.50% (20 days ago); first increase since June 2006; nearly a decade at zero
- Paris COP21 climate agreement December 12: 196 countries adopt historic accord to limit warming to 1.5–2°C; Jamaica a signatory
- US unemployment 5.0%; payrolls solid; inflation below 2% target but rising; Fed declares conditions met
- Fed dot plot: projects four rate hikes in 2016; markets sceptical; price fewer than two
- Global markets volatile through December; oil continues falling toward US$37/barrel; emerging markets under pressure
- BOJ easing; Jamaica NHT J$6.5 million ceiling; rates 0, 2, 4 per cent; IMF EFF progress
The End of the Zero Rate Era: A Historic Monetary Inflection
The Federal Open Market Committee made history on 16 December 2015 by raising the federal funds rate from 0 to 0.25 per cent to 0.25 to 0.50 per cent — the first rate increase since June 2006, ending a period of approximately nine and a half years in which US monetary policy rates sat at or near zero. The decision was unanimous, with all ten voting members in favour. Chair Yellen, at the post-meeting press conference, characterised the move as a reflection of the Committee’s considerable confidence that the US economy had met the conditions for initial normalisation: the labour market had reached maximum employment or was close to it, with unemployment at 5.0 per cent, and inflation — while currently below the 2 per cent target — was expected to move back to target over the medium term as transitory effects from lower energy prices and the strong dollar faded. The historic nature of the moment was not lost on markets: the era of emergency zero interest rates, born in the darkest days of the global financial crisis in December 2008, had formally ended. The accompanying Summary of Economic Projections — the “dot plot” — showed the median FOMC participant projecting four rate increases in 2016, a pace that many market participants and external analysts immediately regarded as too aggressive given the global growth outlook and the trajectory of inflation. Markets priced in fewer than two hikes for 2016 by the end of December.
Paris COP21: A Landmark Climate Agreement
The twenty-first Conference of the Parties to the United Nations Framework Convention on Climate Change, held in Paris, adopted the Paris Agreement on 12 December. The agreement was ratified by 196 countries and committed signatories to holding the increase in global average temperature to well below 2 degrees Celsius above pre-industrial levels, with efforts to limit the increase to 1.5 degrees Celsius. Countries submitted nationally determined contributions — voluntary pledges to reduce greenhouse gas emissions — which, even if fulfilled, analysts judged would result in warming of around 2.7 to 3 degrees Celsius. Nonetheless, the Paris Agreement was regarded as a historic diplomatic achievement: the first universal, legally binding climate framework. For Jamaica, a small island developing state among the most vulnerable on earth to sea level rise, storm surge intensification, and drought, the Paris Agreement’s 1.5 degree goal was an existential priority. Jamaica was among the earliest signatories, and Prime Minister Portia Simpson Miller’s delegation had argued strongly for the more ambitious 1.5 degree target during the negotiations.
Oil Continues Falling; Emerging Markets Under Pressure
Oil prices continued to fall through December, with Brent crude ending the year near US$37 per barrel, its lowest year-end level since 2004. The combination of OPEC’s refusal to cut output at its December Vienna meeting and the continuing growth of US shale production maintained the oversupply dynamic that had been driving prices lower since mid-2014. Emerging market assets remained under pressure through the end of the year, as the prospect of a gradually rising US interest rate cycle and a stronger dollar made the financing of emerging market debts and current account deficits more expensive. Jamaica’s external financing conditions were affected by this broader dynamic, though the IMF programme framework provided an important stabilising backstop. For Jamaica as an energy importer, the sustained low oil price was an ongoing benefit, reducing the import bill and supporting lower domestic inflation and energy costs.
Jamaica Mortgage Market in December
Jamaica’s mortgage market closed 2015 in modestly improved shape compared to the start of the year. The BOJ’s monetary easing had reduced the domestic policy rate and contributed to some easing in commercial lending rates. The NHT’s J$6.5 million individual ceiling and tiered mortgage rates of 0, 2, and 4 per cent continued to define the affordable housing finance framework for qualifying contributors. December is traditionally a period of NHT loan closings, and 2015 was no exception. The historic Fed hike was absorbed by financial markets without disruptive consequences: the move had been extensively telegraphed, and the accompanying message of gradualism was reassuring. Jamaica’s fiscal year performance through the third quarter was broadly on track with IMF programme targets.
Looking Ahead
2016 opens with the first US rate hike cycle in nearly a decade now formally under way. The pace of further increases — which will depend on inflation, employment, and global conditions — is the defining monetary policy question of the year. The Fed’s January 26 to 27 meeting will be the first opportunity to read the Committee’s post-hike assessment. China’s growth trajectory, oil’s direction from current depressed levels, and the ECB’s easing programme all represent significant variables for global financial conditions in 2016. For Jamaica, the IMF programme review cycle and the new budget preparation process will define the fiscal policy agenda. The NHT’s scheme openings and the BOJ’s continuing monetary easing trajectory will remain the primary domestic supports for the mortgage market in the year ahead.
Mortgage & Housing Finance Disclaimer: This publication is for general information only and does not constitute mortgage, financial, legal or investment advice. Mortgage products, lending criteria, interest rates and borrowing costs vary between lenders and may change without notice. Readers should obtain independent advice from a qualified mortgage adviser, financial adviser or legal professional before making financial or property decisions.
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