Fed chairman Jerome Powell said the central bank will start cutting rates well before it hits the inflation goal.

“The reason you wouldn’t wait to get to 2 per cent to cut rates is that would be too late,” Powell said during a media briefing after the rate decision. “You do not overshoot.”

The Federal Reserve’s statement has led Dow Jones Industrial Average jumped 1.4 per cent to close at a record high 37,090.24, marking the first time the benchmark closed above 37,000 mark and breaking last record in January 2022. The S&P 500 rose 1.37 per cent and Nasdaq Composite added 1.38 per cent.

“It may be premature for the Fed to lower rates when second-round effects could fuel inflation in the coming months. We think the first 25-basis-point cut should not take place before mid-2024.”

Inflation in the US fell in November. While consumer prices rose 3.1 per cent year on year in November, they dropped from 3.2 per cent in October. But core prices, which exclude volatile food and energy costs, rose 0.3 per cent from October to November, slightly faster than the 0.2 per cent increase the previous month.

The latest decision was widely expected by traders. More than 98 per cent expected no change to the interest rate and only 1.8 per cent felt a 25-basis-point rate rise was possible, according to CME Fed futures prices.

The pause in interest rates was a much-needed relief for Hong Kong’s businesses and mortgage borrowers. Financial Secretary Paul Chan Mo-po earlier this month said the city was likely to continue operating at a deficit next year given the economic uncertainties created by geopolitical tensions and high interest rates.

The city’s GDP rose by 0.1 per cent to reach 4.1 per cent in the third quarter compared with the previous three-month period, according to official data.

In the second quarter, GDP grew at a revised 1.5 per cent from a year ago, compared with a 2.9 per cent increase in the first quarter. In 2022, it contracted by 3.5 per cent.

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External factors risk for Hong Kong ahead in coming year, finance chief warns

External factors risk for Hong Kong ahead in coming year, finance chief warns

The HKMA last tightened in July, when it lifted the base rate by 25 basis points to 5.75 per cent, the highest level since December 2007. In total, the base rate has risen by 525 basis points since March 2022, even as the city’s economy was mired in a recession.

Commercial banks raised their prime rate five times since September last year by a total of 0.875 percentage points. Bank of China (Hong Kong), HSBC Holdings and its subsidiary Hang Seng Bank raised their prime rates by 12.5 basis points in July to 5.875 per cent. Standard Chartered Bank, Bank of East Asia, Citibank and CCB Asia also increased rates by the same margin to 6.125 per cent.

High interest rates ‘set to endure’ as central banks tackle inflation

Now all eyes are on whether leading commercial banks increase their prime rates. The lenders had raised their mortgage rates for new loans by 50 basis points in September, when the Fed and HKMA paused.

Hong Kong’s one-month interbank offered rate, or Hibor, stood at 5.4106 per cent on Wednesday versus 3.686 per cent in late September. The three-month Hibor rose to 5.3528 per cent from 4.446 per cent over the same period, according to data published by Hong Kong Association of Banks.

“Looking ahead to next year, while the case for lowering interest rates may seem clear to us, that is not necessarily true for everyone at the Federal Reserve,” said Jacky Lam, a financial consultant at Charles Schwab Hong Kong, before the Fed’s decision.