bodyType

customContents

entityId

entityUuid

articlePageQuery

filter

article

articleBaseAdvertisingInfoArticle

articleListArticle

articleSeoArticle

hooksArticleAcknowledgementGateOverlayArticle

hooksTrackPageViewArticle

hooksContentInterestArticle

articleLinkingDataContent

hooksAmpRedirectArticle

articleSchemaContent

liveArticle

advertZone

sentiment

contentLock

topics

types

sections

paywallTypes

createdDate

publishedDate

sponsorType

urlAlias

moreOnThisArticles

commentCount

authorLocations

authors

corrections

displaySlideShow

multimediaEmbed

printHeadline

seriesContainer

articleSpeeches

socialHeadline

headline

images

flag

firstTopic

glossary

flattenTypeIds

image

relatedLinks

relatedNewsletters

__typename

sponsor

pdfFiles

seriesReverseOrder

series

disableOffPlatformContent

published

updatedDate

summary

subHeadline

body

keywords

readingTime

customTimezone

liveContents

Enoch Yiu

The Federal Reserve has raised US interest rates for the first time in almost a decade, meeting market expectations with a move that ends the era of near-zero rates and may lead to billions in capital outflows from the Hong Kong stock and property markets.
The Federal Open Market Committee unanimously voted to set the new target range for the federal funds rate at 0.25 per cent to 0.5 per cent, up from zero to 0.25 per cent, with the decision unveiled at 3am today, Hong Kong time. However, the Fed signalled that further rate hikes will likely be made slowly as the economy strengthens further and inflation rises.
READ MORE: Analysis - Will the Fed signal the next interest rate hike as strongly as this one?
The statement announcing the rate hike said the committee expects “only gradual increases” in rates going forward.
US stocks initially greeted the decision with a muted response, but both the Dow and the Standard & Poor's 500 later rallied strongly and were up 1.28 per cent and 1.45 per cent respectively at the close.
Watch: US Fed raises interest rates for the first time in nine years

Under the peg which links the Hong Kong dollar to the US dollar, the Hong Kong Monetary Authority will decide on how to react to the Fed’s decision. Before the rise, the base rate stood at 0.5 per cent, representing the discount window lending rate between the HKMA and commercial banks.
Commercial banks will decide individually whether to increase their lending or deposit rate.

As part of measures taken by the Fed during the global financial crisis in 2008, its fund rate was cut to between zero and 0.25 per cent, where it had stayed until today. US interest rates had previously not increased since 2006; before that, rates rose from 1 per cent in June 2004 to 5.25 per cent in June 2006.
Mohamed El-Erian, chief economic advisor for Allianz said the Fed was treading carefully.
“Wrapped in dovish language, the Federal Reserve has just embarked on what will be the loosest tightening in its history,” he said. “The Fed is going out of its way to assure markets that, by embarking on a ‘gradual’ path, this will not be your traditional interest rate cycle. Instead it will be one remembered as an unusually loose tightening.”
It takes time for monetary policy actions to effect future economic outcomes
Fed Chai
r Janet Yellen, explaining the need to head off inflation now rather than later
US bond prices sold off in the short end after the decision, while long prices rallied, while the US dollar gained against the euro and yen modestly.
“The committee judges that there has been considerable improvement in labour market conditions this year, and it is reasonably confident that inflation will rise, over the medium term, to its 2 per cent objective,” the FOMC said in its statement following a two-day meeting in Washington. The Fed said it raised rates “given the economic outlook, and recognising the time it takes for policy actions to affect future economic outcomes.”
READ MORE: How much will Hong Kong home prices fall after US raises rates?
Fed Chair Janet Yellen echoed this at a news conference, when she stressed that the rate hike was pre-emptive. Inflation still remains well below the central bank’s 2 per cent target, largely because of transitory factors such as falling oil prices.
Yet the Fed made the move because its policies operate on a lag. Yellen wanted to head off the risk of sharply higher inflation a year from now, rather than today.
“It takes time for monetary policy actions to effect future economic outcomes,” she said.
Heng Koon-how, senior foreign exchange strategist at Credit Suisse, said he believed a coming round of interest rate increases likely meant rates would rise to 1 per cent by December 2016.
Since the US adopted its aggressive easing of monetary policy in 2008, about US$110 billion worth of funds has flowed into the Hong Kong equity and property markets, according to the HKMA.

HKMA chief executive Norman Chan Tak-lam cautioned in September that higher US rates “may lead to some capital outflows”.
Brett McGonegal, chief executive of Reorient, said the rate rise may hurt the US economy. “There is nothing in the numbers nor the current state of the economy that warrants a rate rise,” he said. “In fact the numbers and state of spreads and high yield debt portend a pretty ugly economic situation. This is a deadly game that they are playing and they risk damaging a fragile economy beyond repair.”
McGonegal said he believed the US target rate would not go up more than 50 basis points in this cycle.
“Unfortunately for Hong Kong, the biggest loser in the rate-raise scenario is the property market. Raising rates via the peg into a very slow market is very damaging. Property prices will come down in the near term and I fear that mainland investors will start to sell on the back of this move, pushing prices even lower,” McGonegal said.
Andrew Fung, executive director of Hang Seng Bank, thought the market expected two or three increases of 25 basis points.
“I think this cycle is gradual and very slow - perhaps the Fed fund [rate] will be 2 per cent by the end of 2017. However, a strong US dollar exchange rate may reduce the magnitude of the rate increase,” Fung said, adding that Hong Kong commercial banks might not immediately increase their rates because liquidity in the Hong Kong dollar is good.
READ MORE: How will the US rate hike affect Hong Kong banks?
“Hong Kong dollar commercial lending rates will stay stable and it may take 6 to 9 months before Hong Kong dollar rates rise,” Fung said.
Stephen Innes, Senior Trader at OANDA Asia Pacific, said the many headwinds faced by the global economy – from China’s economic slowdown to the crisis in the Eurozone - meant traders were unsure of the trajectory of further rate movements.
“My view is that a 0.25 per cent rise with an accompanying statement ‘should’ lean dovish with the rate hike cycle to be no more aggressive than 0.75 per each year over a two-year period,” Innes said.
“There is much uncertainly emerging in China, especially with the market now leaning towards further weakness in the RMB. The impact of a Fed rate hike will fall back to the impact on China’s capital outflows. And while I feel that a 0.25 per cent hike in US rates will have some negative effect, it is unlikely to have any major effect,” Innes said.
Additional reporting by Reuters, Bloomberg and Associated Press


Gold still shines in Asia thanks to ‘pent-up demand’ amid volatility

Bitcoin drops, driving US$2 trillion slide in crypto market value

Hong Kong crypto investors stay cautious but upbeat as bitcoin sell-off deepens

‘America First’ Fed? Chinese economists doubt Trump’s chair nominee can shore up US dollar

US Federal Reserve

US Fed raises rates 25 points to end near-zero era: Hong Kong property market expected to take a hit

Federal Reserve Chair Janet Yellen speaks during a press conference following Wednesday’s announcement of the Fed's historic rate increase, the first since 2006, in Washington, DC. Photo: Reuters

Federal Reserve Chair Janet Yellen speaks during a press conference following Wednesday’s announcement of the Fed's historic rate increase, the first since 2006, in Washington, DC. Photo: Bloomberg

Federal Reserve Chair Janet Yellen speaks during a press conference following the announcement of an historic rate increase, the first since 2006, in Washington, DC, December 16, 2015. The Federal Reserve announced Wednesday its first interest rate increase in more than nine years in a landmark move signaling the US has finally moved beyond the 2008 crisis. The Fed raised the benchmark federal funds rate, locked near zero since the Great Recession, by a quarter point to 0.25-0.50 percent, saying the economy is growing at a moderate pace and should accelerate next year. AFP PHOTO / SAUL LOEB

epa05004372 Mass residential housing in Tseung Kwan O, Kowloon, Hong Kong, 31 October 2015. Property analysts are forecasting a drop in home prices in Hong Kong, as a report released by investment bank UBS showed Hong Kong in second place to London as the city most at risk of a proerty bubble. According to data released by the Hong Kong Monetary Authority, new mortgage loans totalled 20.3 billion Hong Kong dollars (Euro 2.4 billion) in September, a drop of 13.4 per cent compared with August. EPA/ALEX HOFFORD

Specialist Robert Nelson, foreground, works with traders at his post on the floor of the New York Stock Exchange, Wednesday, Dec. 16, 2015. Stocks are opening higher, led by gains in banking shares ahead of an interest rate decision by the Federal Reserve. (AP Photo/Richard Drew)

Federal Reserve Chair Janet Yellen speaks during a press conference following Wednesday’s announcement of the Fed's historic rate increase, the first since 2006, in Washington, DC. Photo: AFP

Analysis: Will the Fed signal the next interest rate hike as strongly as this one?

epa05071511 A news report about the United States' Federal Reserve's rate decision is broadcast on a television screen on the floor of the New York Stock Exchange (NYSE) in New York, New York, USA, 16 December 2015. The Federal Reserve is hiking its benchmark interest rate by 0.25 per cent, tightening monetary policy after maintaining an unprecedented near-zero rate since December 2008. EPA/JUSTIN LANE

Federal Reserve Chair Janet Yellen answers a question during a news conference in Washington, Wednesday, Dec. 16, 2015, following an announcement that the Federal Reserve raised its key interest rate by quarter-point, heralding higher lending rates in an economy much sturdier than the one the Fed helped rescue in 2008. (AP Photo/Susan Walsh)

A news report about the US Federal Reserve's rate decision is shown on the floor of the New York Stock Exchange. The quarter-point hike was well flagged. Photo: EPA

How much will Hong Kong home prices fall if US raises interest rates?

TO GO WITH AFP STORY HONG KONG-ECONOMY-HOUSING, FOCUS BY DENNIS CHONG In this picture taken on July 31, 2014, a man walks through a playground as he looks at residential buildings in Hong Kong. The southern Chinese city has been hit with a serious housing shortage as property prices have doubled since 2009, becoming unaffordable for many. At a glitzy show stall at a new residential development in Hong Kong, property agents with loudspeakers promote the latest trend in the overcrowded city -- high-end 'micro-flats' which still come with an eye-watering price tag. AFP PHOTO / DALE DE LA REY

epa05004392 Construction cranes in front of mass residential housing in Tseung Kwan O, Kowloon, Hong Kong, 31 October 2015. Property analysts are forecasting a drop in home prices in Hong Kong, as a report released by investment bank UBS showed Hong Kong in second place to London as the city most at risk of a proerty bubble. According to data released by the Hong Kong Monetary Authority, new mortgage loans totalled 20.3 billion Hong Kong dollars (Euro 2.4 billion) in September, a drop of 13.4 per cent compared with August. EPA/ALEX HOFFORD

Mass-market rents are expected to fall 10 per cent next year. Photo: AFP

US rate hike: How will it affect Hong Kong banks?

A pedestrian walks past an advertisment featuring US dollar bills in Hong Kong on April 6, 2011. The USD clawed back lost ground against the euro in Asian trade on April 5 following remarks by Fed chief Ben Bernanke that rising US inflation would not persist, analysts said. The greenback rose against most other Asian currencies, strengthening to 43.41 Philippine pesos from 43.32 on April 4, to 1,089.66 South Korean won from 1,087.66 and to 8,658.00 Indonesian rupiah from 8,655.00. AFP PHOTO / Antony DICKSON

U.S. Federal Reserve Chair Janet Yellen addresses the Economic Club of Washington in Washington December 2, 2015. REUTERS/Joshua Roberts (UNITED STATES - TPX IMAGES OF THE DAY

Hong Kong’s 32-year-old peg to the US dollar virtually imports monetary policy from the United States. Photo: AFP

Spotlight on Yellen as US Federal Reserve's rate rise looms

Chair of the US Federal Reserve Janet Yellen testifies before a Joint Economic Committee hearing on "The Economic Outlook," on Capitol Hill in Washington, DC. Photo: AFP

Some analysts suggest that while Fed officials want to move slowly, rising inflation could force them to accelerate the pace. Photo: AP

With the expected rate hike, even the ludicrously expensive property market is expected to decrease. Photo: AP

Business

Markets

News

World

FOMC says it is 'reasonably confident' US inflation will rise to two per cent objective


US Fed raises rates 25 points to end near-zero era: Hong Kong property market expected to take a hit

.css-1c6uqr6{color:inherit;font-weight:inherit;font-size:inherit;font-family:inherit;line-height:inherit;overflow-wrap:break-word;}FOMC says it is 'reasonably confident' US inflation will rise to two per cent objective

FOMC says it is 'reasonably confident' US inflation will rise to two per cent objective