Higher rates, bigger debt: why the money stock keeps growing

The Federal Reserve raised rates on 16 September 2026. The headlines said tightening, 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, using Malaysian figures you can check.

What did the Fed decide, and what reaches Malaysia?

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

FOMC, 16 September 2026, unanimous (Federal Reserve)

The statement was short: a solid expansion, stable employment, and inflation still elevated. It carried no forward guidance sentence, so the path is read from the Summary of Economic Projections instead, with medians of 4.1% at end-2026, 4.1% at end-2027, 3.9% at end-2028 and 3.2% in the longer run.

Malaysia is not a pegged economy. The Overnight Policy Rate stayed at 2.75% through 2026, and the last change was a cut in July 2025. What arrives from a Fed decision is capital flow and the exchange rate: the ringgit stood at 4.0687 per US dollar in August 2026, 3.74% stronger than a year earlier.

Did the money stock actually fall while rates rose?

It did not.

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

Series	Latest	Twelve-month change
Malaysian M2	RM 2,665.3 billion (June 2026)	+6.78%
Malaysian consumer prices	137.10 (2010=100, July 2026)	+1.78%
US M2	USD 23,218.0 billion (July 2026)	+5.41%
MYR per USD	4.0687 (August 2026)	−3.74%

Why does a stock of debt push the other way?

A rate rise applies two opposite forces 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 easy to miss because interest does not disappear. It leaves the borrower’s account and arrives in a depositor’s or a bondholder’s account. Repaying principal cancels the deposit the original loan created; paying interest is a transfer between accounts. Where the borrower is a government, the payment is a net flow out of the government and into the private sector.

In Malaysia that second force is large, because the stock of debt is almost as big as the stock of money.

Household and central government debt combined (RM 2,734.3 billion, Q4 2025) as a share of M2 (RM 2,665.3 billion, June 2026)

Series	Amount	Reference date
Household debt	RM 1,413.5 billion	Q4 2025
Central government debt	RM 1,320.8 billion	Q4 2025
M2	RM 2,665.3 billion	June 2026

Note the order: household debt is larger than central government debt. A change in interest rates in Malaysia therefore works mainly through household balance sheets rather than the government budget. If that whole balance absorbed a 0.25 percentage point increase immediately, annual interest would rise by roughly RM 6.8 billion.

When should you not use these figures directly?

First, the reference dates differ: M2 is June 2026, consumer prices are July 2026, and the debt series are the fourth quarter of 2025. Any ratio should carry those dates.

Second, do not compare debt levels with other economies. Government debt may be central or general government, and household debt may count bank lending only or total liabilities.

Third, an unchanged OPR does not mean unchanged financial conditions. Exchange rates and market rates can move while the policy rate stays put.

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