Why a rate rise does not shrink the stock of money

The Federal Reserve raised rates on 16 September 2026. The headlines used the word tightening, and yet over the same months the US money stock grew faster rather than slower. This note traces what sits between a policy rate and the quantity of money, and what that chain looks like from a currency that imports its rate.

What does a US rate rise transmit to Hong Kong?

The FOMC raised its target range from 3.50-3.75% to 3.75-4.00%, a quarter point, by a unanimous 12-0 vote. It was the first increase since 2023.

FOMC, 16 September 2026, unanimous (Federal Reserve)

The statement was short. It described a solid expansion and stable employment, and gave elevated inflation as the reason to act. It contained no forward guidance sentence, because the current chair has removed that passage, so the path has to be read from the Summary of Economic Projections instead. Those medians were 4.1% at end-2026, 4.1% at end-2027, 3.9% at end-2028 and 3.2% in the longer run.

For Hong Kong the transmission is mechanical rather than discretionary. Under the Linked Exchange Rate System the HKMA Base Rate is set by a published formula: the higher of the US target range lower bound plus 50 basis points, and the average of the five-day moving averages of overnight and one-month HIBOR. The Base Rate stood at 4.00% through 16 September 2026.

Did the money stock actually fall while rates rose?

It did not. Growth accelerated.

US M2, twelve-month growth, December 2025 → July 2026 (FRED M2SL)

Hong Kong’s own series also grew. M2 was HKD 9.28 trillion in June 2026, 2.65% higher than twelve months earlier, while consumer prices rose 1.65% in the year to July 2026.

Series	Latest	Twelve-month change
Hong Kong M2	HKD 9.28 trillion (June 2026)	+2.65%
Hong Kong consumer prices	149.63 (2010=100, July 2026)	+1.65%
US M2	USD 23,218.0 billion (July 2026)	+5.41%
HKD per USD	7.8425 (August 2026)	+0.21%

Why does a stock of debt push the other way?

Because a rate rise applies two opposite forces to a money stock at the same time.

Visual guide

Why does a stock of debt push the other way?

1. Restraining

   How it works

   Borrowing costs more, so less new credit is created

   Direction

   Down (−)

2. Enlarging

   How it works

   Interest owed on existing debt grows

   Direction

   Up (+)

Force	How it works	Direction
Restraining	Borrowing costs more, so less new credit is created	Down (−)
Enlarging	Interest owed on existing debt grows	Up (+)

The second force is the one that is easy to miss, and the reason is that interest does not disappear. It leaves the borrower’s account and arrives in the account of a depositor or a bondholder. Repaying principal cancels the deposit that the original loan created; paying interest is a transfer between accounts. Where a government is the borrower the effect is clearer still, because its interest payment is a net flow out of the government and into the private sector.

The size of that second force depends on how much debt already exists. In the United States, federal interest payments reached USD 931 billion in the first ten months of fiscal 2026, 11% more than a year earlier, and the Congressional Budget Office projects net interest rising from about USD 1.0 trillion in 2026 to USD 2.1 trillion in 2036.

When should you not use these figures directly?

First, the reference months differ. Hong Kong M2 is June 2026, Hong Kong consumer prices are July 2026, and US M2 is July 2026. Any comparison should carry those dates.

Second, M2 is not defined identically across jurisdictions. Each series describes its own economy, so read the change within a series rather than the level against another economy’s level.

Third, a rate that is imported by formula does not respond to local conditions. A Base Rate movement that follows a US decision says something about the US target range and HIBOR, not about Hong Kong demand or Hong Kong inflation.

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