The Fed has joined the RBA in hiking rates, and while the decision was made in the US, Aussies could feel it through the dollar, imports and inflation.
For most of 2026, the US Federal Reserve (the Fed) has been like the nonchalant friend of the group, keeping interest rates unchanged while the Reserve Bank of Australia (RBA) cautiously raised rates three times to tackle growing inflation pressures.
But this month the Fed officially joined the RBA in putting its hiking boots back on. For the first time since July 2023, the Fed increased its target rate by 0.25% to 3.75-4%.
Now before you mentally exit the chat, we know an interest rate decision on the other side of the world might seem kind of irrelevant to Australians (after all, you’re not paying off a mortgage in America)... but there are reasons Aussies should still care.
The Fed only sets interest rates for the US economy but the US dollar is used pretty much everywhere.
It’s the world’s dominant reserve currency and is widely used in global trade, borrowing and investing. In fact, when central banks around the world stockpile foreign currencies, around 57% of those reserves are held in US dollars.
Then there’s the sheer size of US financial markets. When the Fed changes interest rates, it’s not just changing how much Americans pay on their mortgages. It’s changing the potential returns available in one of the biggest financial markets in the world.
Let’s break it down.
When US interest rates rise, interest based US investments (e.g. bonds) can suddenly look more attractive to global investors.
That doesn’t mean everyone immediately sells their Australian investments and sends their money to America, but higher rates can encourage investors to reconsider where they want their money.
And when trillions of dollars are moving around global markets, even small changes can create ripple effects - including here in Australia.
Put simply, investment money typically flows to where it can earn the most money.
When a country, like the US raises its interest rates, then US savings accounts, bonds and other investments typically start paying more in returns. As a result, investors from other countries want a piece of that.
But to buy those investments they need that country's currency. More demand for the currency pushes its value up.
If Australia doesn't raise its interest rates to keep up, Aussie investments look less attractive by comparison. Fewer people want Australian dollars, so our dollar gets weaker.
And a weaker Aussie dollar isn’t just annoying when you’re booking your next overseas holiday.
It can also make the things Australia buys from overseas more expensive. Think: fuel, electronics, machinery and imported materials used by Australian businesses.
Those higher costs can eventually make their way into the prices we pay. AKA: more inflation.
And considering inflation is exactly what the RBA has been trying to get under control, you can start to see why it cares when the Fed makes a move.
Not necessarily.
The RBA makes its decisions based on what’s happening in the Australian economy, including inflation, employment, spending and economic growth.
The Fed is doing the same thing for America.
In fact, 2026 has been a pretty good example of how the RBA can move differently. While the Fed spent most of the year keeping rates unchanged, the RBA raised rates three times.
Right now, the Fed and RBA have pretty similar goals: both are trying to slam the brakes on inflation. So while the Fed doesn’t tell the RBA what to do, it can certainly change the conditions the RBA has to work with.
That’s why interest rate changes in the US can still find their way into your wallet here - through the interest you pay on a mortgage, the return you earn on savings, and even the price of everyday goods in Australia.
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