The Fed Hikes for the First Time Since 2023, and the RBA Is Probably Next

Attention now turns to the RBA, which decides on 29 September — with Australia’s jobs figures, due later this week, the last major data beforehand. Here is this week’s wrap.

Key Takeaways

• The Fed raised rates. The Federal Reserve lifted its benchmark rate by a quarter-point to 3.75–4.0%. It was its first hike since 2023, and most officials expect one more this year.

• Markets took it in their stride. Despite the hike, US shares held up over the week. The S&P 500 was relatively flat and the Nasdaq rose on the week while bond yields eased.

• Other central banks moved too. The Bank of Japan lifted rates to a 31-year high, while the Bank of England held but indicated a bias towards a hike in the future.

• The RBA may be next. Markets price around a 80% chance of an RBA hike on 29 September; this week’s jobs report is the last major read before the decision.

The Fed Raises Rates for the First Time Since 2023

Last week the Federal Reserve lifted its benchmark interest rate to 3.75–4.0%. It was the Fed’s first rate rise since 2023, and the vote was unanimous. Chair Kevin Warsh said three things had changed since the previous meeting: the economy had strengthened, inflation hadn’t slowed, and geopolitical tensions had intensified. The Fed’s updated projections showed most officials expect one more increase before the end of the year, though none are pencilled in for 2027. In short, the central bank has moved from watching inflation to actively leaning against it.

Other Central Banks Keep Tightening and attention shifts to the RBA

The Fed was not alone. The Bank of Japan raised its policy rate to 1.25%, its highest in more than three decades. The European Central Bank had already raised its key rate to 2.50% earlier in the month — its second hike this year — as energy costs pushed euro-zone inflation to a three-year high. The Bank of England held steady at 3.75%, but with three of its nine members voting for a change and the bank flagging that inflation risks had risen. Together with the Fed’s move, it points to a broad tilt among the major central banks towards keeping rates higher.

Closer to home, the focus is the RBA’s decision on 29 September. After sticky underlying inflation and a stronger-than-expected economy, markets price around a 80% chance of a rate rise, which would lift the cash rate from 4.35% to 4.60%.

Shares Hold Firm and Yields Ease, Despite the Rising Central Bank Rates

Although the Fed raised rates and flagged another increase, US shares held up last week and bond yields eased back a little. The S&P 500 finished roughly flat, the tech-heavy Nasdaq rose. The 10-year Treasury yield, which had pushed to around 5% — a multi-year high — before the decision, drifted lower afterwards. The likely reason for a positive market reaction was most Fed officials seeing just one more rate move this year rather than an extended campaign, which reassured investors and gave some relief to rate-sensitive technology stocks. Beneath the surface, chipmakers rose while some of the big AI companies eased, as investors weighed the heavy borrowing they are taking on to fund data centres. Over the week, last week, in Australia the market was modestly down 0.1% for the ASX 200, with small caps outperforming.

Looking Ahead

It is a significant fortnight for Australian rates. Thursday’s jobs figures are the immediate focus, ahead of the RBA’s decision on 29 September. Offshore, US inflation data (the Fed’s preferred measure) is due late in the week, giving a first read on price pressures since the Fed’s move. Oil and the Middle East remain in the background, still feeding into the inflation picture.

Key Dates to Watch

• Australian jobs (August) — 25 September: The last major data before the RBA decides, and a key swing factor between a hike and a hold.

• RBA decision — 29 September: Markets lean towards a hike to 4.60%, at around 72%, but it remains a close call.

• US inflation (PCE) — late this week: The Fed’s preferred inflation gauge, the first reading since its rate hike.

• Oil & the Middle East — ongoing: Crude near US$100 continues to feed into fuel prices and the inflation outlook.