Introduction to the US Federal Reserve’s Decision
The US Federal Reserve has made its last rate cut of the year, reducing the benchmark interest rate by 0.25 percentage points to between 3.5 per cent and 3.75 per cent. This decision was widely expected by market insiders but was met with division among the voting central banking members. The reduction brings the federal funds rate to its lowest level in more than three years.
Impact on Hong Kong
Thanks to the US-Hong Kong dollar peg, the Hong Kong Monetary Authority (HKMA) cut its base interest rate by a quarter of a percentage point to 4 per cent, the city’s lowest base rate since October 2022. However, the six big banks in the city are keeping their prime lending and savings rates unchanged to protect their margins. As a result, the US rate cut won’t offer any short-term benefits to local mortgage holders and other borrowers.
Division and Uncertainty
The more significant aspect of the Fed’s decision is the highly divisive context in which it was made, both within the American central bank itself and in domestic politics under US President Donald Trump. This growing uncertainty about the future direction of US monetary policy has been warned against by HKMA chief executive Eddie Yue Wai-man. Of the 12 voting members on the Federal Open Market Committee, three voted against the cut, with two wanting to keep rates unchanged and one wanting a larger cut.
Future of the Federal Reserve
The latest projections by the US Fed on interest rates also offer little internal consensus. Moreover, the real question is who will replace the outgoing Fed chairman Jerome Powell, against whom Trump has repeatedly expressed hostility. Whoever becomes the next head of the world’s most powerful central bank is expected to be friendly to Trump, leading to concerns about the Fed’s long-standing institutional independence from political interference.
Implications for Hong Kong’s Financial Stability
While a pillar of financial stability, Hong Kong’s peg is sensitive to increasingly unpredictable domestic developments in the US. The city’s financial system is closely tied to the US, and any changes in US monetary policy can have significant effects on Hong Kong’s economy.
Conclusion
In conclusion, the US Federal Reserve’s decision to cut interest rates has significant implications for Hong Kong’s financial system. While the rate cut may not offer short-term benefits to local borrowers, the uncertainty surrounding the future direction of US monetary policy is a cause for concern. The potential replacement of the Fed chairman with someone friendly to Trump raises questions about the Fed’s independence and its ability to make decisions without political interference. As Hong Kong’s financial stability is closely tied to the US, it is essential to monitor these developments closely and be prepared for any potential changes in the global economic landscape.
