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Hedge Clippings | 09 October 2026 The Fed, the RBA and the Politics of Higher Rates Those hoping September's US interest-rate increase was a one-off probably found little comfort in this week's release of the Federal Reserve minutes. The Fed raised its target range by 25 basis points to 3.75 to 4.00% in September, with every voting member in favour. More importantly, most participants thought another increase would probably be appropriate before year-end. Several judged the current rate to be either not restrictive, or only mildly restrictive. That doesn't necessarily mean another rise at the Fed's October meeting due at the end of the month. Governor Christopher Waller said this week there was flexibility over timing, and other Fed officials have indicated December may be more likely. But that rather misses the larger point: the debate has shifted from whether rates have peaked to how much more tightening might be needed, and how quickly. The reasons should sound familiar to Australians. The Fed is worried that inflation remains too persistent. Higher energy prices resulting from the Middle East conflict are part of the problem, but not all of it. Officials also pointed to resilient domestic demand, the extraordinary AI investment boom, rising business costs and evidence that companies have become more successful at passing those costs on to consumers. Short-term inflation expectations are elevated as well. And that matters because central banks can live with temporary inflation shocks; what they fear is those shocks becoming embedded in wages, prices and expectations. Unfortunately for Trump, the calendar isn't especially helpful The US midterm elections are on November 3rd. Trump isn't personally on the ballot, but control of Congress is, and presidents inevitably wear a fair amount of political responsibility for the economy. That makes higher rates awkward. Mortgage repayments, credit cards, car finance and business borrowing are exactly the sort of things voters notice directly. And in car mad America, fuel prices are probably top of the list. And the political backdrop is already uncomfortable. A Reuters/Ipsos poll released this week put Trump's approval rating at 32% and found a substantial enthusiasm gap between people who voted for Kamala Harris in 2024 and Trump voters heading into the midterms. That isn't an election forecast, but it demonstrates how important the economy and cost of living have become politically. Trump, of course, wants much lower interest rates. Yet the Fed is signalling that inflation may require still more restraint. There is an uncomfortable circularity here. Trump wants lower rates because they would ease pressure on households and support economic activity. The Fed is keeping rates high because inflation remains too high. And some of the risks identified by the Fed, energy prices, tariffs and the investment boom associated with AI infrastructure, are not problems monetary policy can solve directly. The Fed cannot produce more oil, settle geopolitical conflicts or build more generating capacity. What it can do is suppress demand sufficiently to stop those price increases spreading through the rest of the economy. Which is exactly what central banks do, however politically inconvenient. Meanwhile, back in Australia... The comparison is striking. The RBA has now increased Australia's cash rate four times during 2026, from 3.60% at the beginning of the year to 4.60% following September's increase. And Michele Bullock's explanation could almost have been written in Washington. Inflation was already too high before the latest energy shock. Domestic spending and investment had been stronger than expected, productivity remained weak, the labour market was still somewhat tight and businesses were reporting cost pressures which they were increasingly passing on to customers. Then came sharply higher global energy prices and rising prices for technology-related goods associated with the AI boom. So perhaps the lesson from both central banks is essentially the same: Energy may have poured petrol on the inflation fire, but it didn't light the match. Both the Fed and the RBA are worried that a series of supposedly temporary shocks is turning into persistent inflation. And both appear prepared to keep policy restrictive rather than risk allowing inflation expectations to become entrenched again. For investors, that argues against assuming that the next move must be down simply because rates have already risen sharply. The Fed minutes leave another US increase this year very much alive. In Australia, the RBA will increasingly want to see what four hikes have already done to housing, household spending and demand. But if inflation refuses to cooperate, the Board has made it perfectly clear that returning inflation to target comes first. Albo might want to take note And then there is the politics. Anthony Albanese might reasonably take an interest in what is happening to Trump, even though the two political situations are obviously very different. Australia's next federal election is expected in 2028. Or about 18 months away. That sounds like plenty of time. Albanese's immediate difficulty is that with a volatile electorate, even many labour voters have lost faith in him. A recent RedBridge/Accent poll put his net favourability at minus 27, Labor's primary vote at 28%, and One Nation at 29%. A broader polling aggregation similarly has Labor and One Nation virtually level on primary vote, although Labor currently retains a narrow two-party-preferred lead over the Coalition. That alone is an extraordinary change from the political landscape at the last election. The government's opponents will continue to prosecute claims of broken election promises and attack Jim Chalmers' budget and tax changes. Labor will argue that global inflation, energy costs and external shocks have played a significant part in the economic squeeze. Ultimately, voters will decide which explanation they believe. But the economic reality is harder to miss, and ultimately the responsibility of the government. If inflation stays sticky, interest rates stay higher for longer. If rates remain higher, mortgage holders, businesses and consumers feel the pain. And if economic activity slows sufficiently to bring inflation down, the government then has to deal with weaker growth and potentially higher unemployment, and the possibility of a recession. None of those is particularly attractive eighteen months out from an election. Then there is Pauline Hanson and One Nation. At the last federal election, the suggestion that One Nation might be competing with Labor for the largest national primary vote would have seemed fanciful. Today it is showing up in actual polling. Whether that persists is another matter entirely, but its emergence changes the political equation for both major parties. Trump is discovering that an economy can look reasonably resilient in the national statistics while it still feels uncomfortable around the kitchen table or at the petrol station. Albanese has considerably longer before Australians vote again, but he faces much the same risk: voters tend to experience the economy through their mortgage, grocery bill and household budget rather than through GDP statistics or Treasury forecasts. As Harold Wilson is reputed to have observed, "a week is a long time in politics". If that's right, eighteen months is a very long time indeed. News | Insights AI, Inflation and a record IPO: Decoding the ASX reporting season | Magellan Investment Partners September 2026 Performance News |
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