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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