Hedge Clippings | 18 September 2026

Higher for Longer, Whether We Like It or Not

If anyone was still hoping the world's central banks might declare victory over inflation and return interest rates to the comfort zone of the past decade, this week provided another fairly convincing reason to think again.

The US Federal Reserve unanimously increased its target rate by 25 basis points to 3.75-4.00%, its first increase since 2023, with new Chairman Kevin Warsh making it clear that inflation, rather than keeping the occupant of the White House happy, remains the priority. The Fed said inflation remains elevated and that the increase would support a "timelier return" to its 2% target.

Donald Trump, predictably, wasn't impressed. He took to social media to announce that US interest rates should be "1%, or less", although notably spared Warsh the sort of personal criticism regularly directed at his predecessor Jerome Powell. Trump subsequently confirmed he retained confidence in his appointee. Perhaps appointing the Fed Chairman is one thing; getting him to do what you want once he's there is another.

The bond market seems equally unconvinced that cheap money is just around the corner. The US 10-year Treasury yield reached 5% this week, a useful reminder that central banks only control one end of the yield curve.

On this side of the Pacific, the RBA faces much the same problem, albeit with an Australian flavour.

Governor Michele Bullock appeared before the House of Representatives Standing Committee on Economics in Canberra today and didn't leave much doubt about what is keeping the Monetary Policy Board awake at night. Inflation has fallen dramatically from its 7.9% peak at the end of 2022, but after briefly returning to the 2-3% target band, it accelerated again during the second half of 2025. Headline and underlying inflation have been running at around, or slightly above, 3½%.

More importantly, the RBA doesn't think the problem is going away quickly.

The Bank has already increased rates by 75 basis points this year, while its August forecasts didn't have inflation returning to around the midpoint of the target range until late 2027. Since then, according to Bullock, some of the upside risks the RBA was worried about appear to be materialising.

And therein lies the problem.

Nor, of course, is inflation simply an Australian or American problem. It is global, helped along, once again, by that man in the White House. Trump's tariffs have added to international cost pressures and uncertainty, while the Middle East conflict and the resulting surge in energy prices have provided another inflationary shock. Brent crude above US$100 a barrel is hardly confined to the bowsers of Sydney or Los Angeles; it flows through transport, manufacturing, agriculture and ultimately consumer prices across the world.

For evidence, look no further than Japan. The Bank of Japan today joined the tightening cycle with a 25 basis point increase of its own, taking its policy rate from 1.0% to 1.25%, its highest level in 31 years. The contrast is interesting: Japan is fighting many of the same global inflationary pressures as the US and Australia, but doing so with interest rates starting at just 1%, rather than the 3-4% territory confronting American and Australian borrowers.

Japan also illustrates how interconnected the problem has become. Higher US rates can weaken the yen, making imported oil and other goods more expensive for Japan and adding still more inflationary pressure. Throw in Trump's tariffs, the Middle East conflict and US$100-plus oil, and central bankers from Washington to Tokyo to Martin Place are increasingly fighting different versions of the same inflationary fire.

The ongoing Middle East conflict has pushed oil back above US$100 a barrel, feeding directly into petrol prices and indirectly into virtually everything that needs to be manufactured, transported or delivered. Businesses are increasingly passing those higher input costs on to consumers.

At the same time, the global AI investment boom is creating its own supply constraints and price pressures, while domestically the labour market remains relatively tight. Unemployment at 4.5% might have risen, but by historical standards it remains low, while the proportion of Australians with a job remains close to record levels.

So the RBA is faced with an uncomfortable balancing act.

Growth is slowing. Household spending is moderating. Housing prices have fallen in most capital cities, and new housing lending has tanked, thanks to the changes announced in the May budget. Higher mortgage rates are yet to work fully through household budgets because, as the RBA continually reminds us, monetary policy operates with a lag.

Yet inflation remains too high.

Even more interesting was Bullock's acknowledgement of the impact falling property prices can have on the wider economy. Lower household wealth can reduce consumption, falling turnover means fewer purchases of furniture and appliances, while weaker prices can reduce the incentive for residential construction.

In other words, lower house prices aren't simply painful for homeowners; they become part of the mechanism through which higher interest rates slow the economy.

That leaves the Monetary Policy Board with an unenviable decision when it meets later this month. Markets are pricing a September increase as the base case, although not quite the unanimous certainty some commentary suggests; recent market pricing has put the probability at roughly three-quarters.

Complicating matters further, the Board will make its decision before receiving the August CPI figures which are not due until 30th September, the day after the RBA's announcement.

Unless something changes dramatically between now and then, the RBA's hand is close to being forced.

With oil above US$100, businesses passing higher costs through, underlying inflation still around 3½%, and the world's largest central bank having just raised rates itself, sitting on the sidelines becomes increasingly difficult to justify.

The irony, of course, is that the fourth Australian rate rise of 2026 may arrive just as the cumulative effect of the first three is starting to bite.

That's the problem with monetary policy. Central banks drive by looking through the rear-view mirror, while steering an economy that reacts with a considerable delay.

Sometimes they don't know if they've hit the brakes too hard until we're all already through the windscreen.

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Hedge Clippings | 11 September 2026

Oil closed above $100 again this week on the back of tit-for-tat strikes in the Strait of Hormuz, with Australia more exposed to the price of oil than almost any other developed economy. The RBA's deputy governor told the ABC that the country is "furious" about inflation for good reason, while in the US, strong job numbers and tonight's CPI figure are reshaping the case for a September hike.

Oil is back above $100 on direct strikes against Iranian tankers, while Australia consumes more diesel per person than any other OECD economy

Brent crude settled above $100 a barrel this week after US Central Command confirmed American forces destroyed Iranian oil tankers in the Gulf of Oman and near Kharg Island, Iran's primary export hub, while Iranian backed Houthis separately attacked Saudi energy facilities. It is Brent's first close above $100 since July, and Iran has vowed to intensify attacks if US strikes continue, a genuine escalation rather than the on-again, off-again diplomacy Hedge Clippings has tracked for months. US diesel hit a record US$5.94 a gallon on the news.

The number matters disproportionately for Australia: per OECD data, Australia consumes 1.10 tons of oil equivalent of diesel per capita per annum, the highest of any OECD country and well above the 0.64 average, while CBA research puts Australian diesel consumption at 7.67 barrels per capita, roughly 80% higher than the US and eight times China's. Only around 13% of Australia's diesel is refined domestically, making it one of the world's largest diesel importers, with road transport, mining and agriculture together accounting for the bulk of demand.

Every prior Hormuz escalation has fed directly into Australian headline CPI with a lag of one to two months, because diesel touches freight, food logistics and construction costs before it shows up in a fuel bowser, and the CPI. This is not a story to file under "offshore geopolitics." It is a direct input to inflation that the RBA will react to at its next meeting.

"People are furious about inflation": Deputy Governor Hauser was unusually blunt, and the market still isn't fully buying the hawkish part

RBA Deputy Governor Andrew Hauser told the ABC's 7.30 report on Tuesday that inflation is the economy's "one big problem" and that Australians are, in his words, "furious about inflation": "Everywhere I go, I hear cost, cost, cost, inflation, inflation, inflation, and that's our responsibility. We have to put that right." He named three specific forces keeping inflation elevated, the Middle East crisis, the global AI driven investment boom, and weakness in the economy's supply potential, and made the tightening bias explicit: "We could raise interest rates sharply, we could do it tomorrow," though he stressed the board isn't at that point because it still wants to protect employment gains and avoid an unnecessarily hard landing. Assistant Governor Sarah Hunter made similar remarks the same day, reinforcing the message rather than softening it. Headline inflation stood at 3.5% to July, trimmed mean has been at 3.6% for three months in a row, and all four major banks are now forecasting a hike by year end.

The genuine tension is that this is some of the most explicitly hawkish language from the RBA all year, delivered three weeks ahead of the 29-30 September board meeting. Hauser's own framing supports that read Australia is "doing quite well" on unemployment and real household incomes, in his words, which is precisely the kind of language a central bank uses when it wants markets to take a hike seriously without actually committing the board to one. The next inflation number is due the day after the September meeting ends, meaning the board will vote without the data point markets might expect it to wait for.

Coordinated hawkish messaging from two RBA officials in one day, with more interviews and commentary due next week, and ahead of a meeting where the board won't have the freshest inflation data, looks like a deliberate attempt to do some of the tightening through language rather than the cash rate itself. The RBA's next real lever is action, not more interviews.

US Payrolls blew past forecasts, oil is surging, and tonight's CPI result lands five days before the Fed decides

US non-farm payrolls for August, released on September 4th, rose 162,000 against a forecast of just 55,000, the strongest number since March and the first month of net job gains in five months, with unemployment steady at 4.1% and prior months revised up a combined 55,000. That will be the last major inflation data before the Fed's 15-16 September meeting, with economists expecting headline inflation to accelerate to around 3.4% annually on rising energy costs, while core CPI eases to roughly 2.4%. Fed Chair Kevin Warsh used his Jackson Hole speech last month to make clear he isn't ready to declare victory, in his words, recent readings "do not tell me that underlying trends have meaningfully improved." Rate hike odds have whipsawed for exactly that reason, and Brent's move back above $100 this week, combined with the payrolls number, is the fresh input markets are now pricing into a decision that looked closer to settled a fortnight ago.

A strong jobs report and an oil shock landing in the same fortnight is the least convenient combination for a Fed trying to justify a pause. If tonight's CPI shows the energy pass-through Warsh has been warning about, the "coin flip" Hedge Clippings described a week ago tips meaningfully back toward a hike before next week's decision.

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