RBA vs. Fed: The Impact of the ’Higher for Longer’ Stance on the AUD/USD

For traders of the AUD/USD currency pair, the markets are entering a period of heightened uncertainty as both the Reserve Bank of Australia and the Federal Reserve grapple with conflicting economic signals that could reshape the trajectory of the AUD/USD exchange rate depending on how they act on those signals. Recent policy meeting minutes from both central banks reveal a striking parallel: neither institution is confident about its next moves, leaving traders to navigate an increasingly complex landscape where traditional assumptions about monetary policy are being challenged.

RBA Caught Between Conflicting Signals: Is Policy Still Restrictive Enough?

The RBA’s November meeting minutes paint a picture of a central bank caught between competing pressures, struggling to determine whether its current policy stance remains appropriately restrictive.

As the cash rate was lowered to 3.6%, members noted that the reduction had successfully translated into easier financial conditions across Australia, through lower bank funding costs and subsequently, reduced lending rates for consumers and businesses. The most notable development has been the acceleration in housing market activity, particularly the surge in investor credit, which tends to respond more aggressively to rate cuts than owner-occupier lending.

This revival in housing market momentum has sparked intense debate within the RBA about whether monetary policy retains sufficient restrictiveness to anchor inflation expectations. The central bank’s assessment reveals a mixed picture, with various indicators pointing in different directions.

Some metrics suggest financial conditions may actually be accommodative, including compressed risk premia in capital markets, readily available funding, and lending rate spreads that sit well below pre-pandemic levels relative to the cash rate. These developments imply that the neutral interest rate may have risen, meaning the current cash rate level exerts less downward pressure on economic activity than it would have several years ago.

Yet, not all data align. Other indicators persist in suggesting a modestly restrictive stance, leading to uncertainty about the state of monetary policy. This ambiguity matters for the policy outlook because the RBA’s central expectation that inflation will gradually return to target depends critically on maintaining some degree of policy restraint.

The inflation data has complicated the picture further, with both headline and underlying measures landing significantly higher than the RBA forecast in August. Both now stand at or above 3%, well outside the central bank’s 2 to 3 percent target band. The bank now expects inflation to remain elevated until mid-2026, settling at 2.6% rather than the preferred 2.5 percent midpoint of its target range.

This persistent inflation, combined with the unexpectedly strong employment rebound in October that pushed the unemployment rate back down to 4.3%, has led markets to reassess the probability of further rate cuts. What seemed like a continuing easing cycle just weeks ago now appears potentially finished, with market pricing suggesting only a 40% chance of a May 2026 cut.

The minutes make clear that the RBA board sees plausible scenarios pointing in both directions. Members noted several factors that could justify holding rates steady, including stronger-than-expected demand recovery or persistently high inflation. Conversely, they acknowledged scenarios requiring further easing, such as material labor market weakening or a recovery that significantly lags expectations.

The board’s conclusion that they can afford patience while assessing incoming data reveals a central bank unwilling to commit to a predetermined path, preferring instead to maintain maximum flexibility as economic conditions evolve. This cautious stance was reinforced by Assistant Governor Sarah Hunter, who outlined three fundamental questions the RBA is examining that could influence policy.

These include whether businesses have permanently altered their price-setting behavior following the pandemic, how to accurately assess the economy’s supply capacity and the distance to full employment, and whether monetary policy transmission channels have changed given the housing market’s stronger-than-expected response to rate cuts.

Federal Reserve Divisions Deepen: A Three-Way Split on December Rate Decision

Across the Pacific, the Federal Reserve faces its own divisions, with the October meeting minutes revealing deepening disagreements about the appropriate policy path. The document reveals a sharply divided group of participants, with strongly divergent opinions on the appropriate decision for the December meeting.

Some members said to favor lowering rates toward a more neutral setting, citing increased downside risks to employment and diminished upside risks to inflation. Others could support a rate cut but were also comfortable maintaining the current range. Several members seem to prefer no change, expressing concern that progress toward the 2% inflation objective has stalled and that longer-term inflation expectations could rise without timely progress.

This three-way split represents a narrow and potentially shifting majority, with no clear consensus emerging about the balance of risks.

Richmond Fed President Thomas Barkin captured the dilemma perfectly, noting that both sides of the Fed’s dual mandate are under pressure simultaneously.

While headline unemployment remains modest at 4.3%, regional business contacts describe a weaker labor market than official statistics suggest, with slack hiring outside skilled trades and recent layoffs at large corporations. Meanwhile, inflation remains somewhat elevated, with consumer prices running at 3% through September and concerns about tariff pass-through potentially driving further increases in core goods inflation.

The recent government shutdown has severely limited the data available to Fed officials, forcing policymakers to substitute comprehensive official statistics with private-sector surveys and business intelligence. Consequently, the staff assessment reports elevated forecast uncertainty.

Key risks cited include a moderating labor market and still-elevated inflation, alongside general uncertainty regarding government policy. This environment makes policy calibration difficult: risks to economic growth (GDP) and employment lean toward the downside, while the probability of higher inflation is skewed to the upside.

What Should Traders Watch?

For AUD/USD traders and investors, this dual uncertainty creates both risk and opportunity. The exchange rate is likely to exhibit heightened sensitivity to economic data releases from both countries, with each report potentially triggering reassessments of relative monetary policy trajectories.

Australian data showing persistent inflation strength or continued labor market resilience would support expectations that the RBA’s easing cycle has concluded, potentially providing upside support for the Australian dollar. Conversely, signs of meaningful economic softening could revive rate cut expectations and weigh on the currency.

From the US perspective, data suggesting continued labor market cooling without corresponding inflation progress could push the Fed toward additional easing despite internal divisions, potentially weakening the US dollar and lifting AUD/USD. However, evidence of inflation persistence or economic resilience could shift the Fed toward a prolonged pause, providing dollar support.

The key metrics to monitor include Australian employment reports, quarterly CPI data, and housing market indicators, alongside US nonfarm payrolls, CPI readings, and any forward guidance from Fed officials that might clarify the balance of opinion on the committee.

The broader consideration for market participants is that both central banks appear increasingly uncertain about their policy frameworks, questioning fundamental assumptions about neutral rates, policy transmission, and inflation dynamics. This uncertainty suggests that policy paths could shift as new information arrives, creating a volatile environment for the AUD/USD exchange rate.

Traders should prepare for a period where data dependence truly matters, where each significant economic release has the potential to meaningfully alter policy expectations and currency valuations. In this environment, maintaining flexibility and avoiding overcommitment to directional views may prove the most prudent approach as both central banks navigate their way through genuinely uncertain terrain.

Sources: Reuters, Wall Street Journal, RBA, Fed