The US Federal Reserve delivered its third rate cut for the year on 10 December 2025, a 25-basis-point reduction that moved the federal funds rate into a 3.5%–3.75% range. On paper, it’s a cut. In practice, it’s a caution signal that the path to “normal” monetary policy is narrowing.
For Australia, the implications go beyond currency moves and short-term market volatility. The RBA is still navigating slower growth, stickier inflation, and a more fragile household sector heading into 2026.
A Divided Decision
The US decision wasn’t clean. A 9 to 3 vote revealed a committee sharply divided over where economic risks lie. This level of internal disagreement hasn’t been seen in years, and markets reacted accordingly.
Chair Jerome Powell said the Fed is now in a “comfortable” position to wait and watch, emphasising that policy is sitting near the “upper end of neutral.” That means each incoming inflation and labour-market print will drive the next move, rather than a pre-set policy path.
The Path Forward
The Fed’s latest projections showed a notably cautious trajectory:
- Only one rate cut pencilled in for 2026, followed by another in 2027
- Rates returning to a long-run level of around 3% by 2027
- Inflation not falling back to 2% until 2028
This is a far slower glide path than markets had hoped for, and it increases the importance of each monthly data release. Adding to the complexity, Powell has just a small number of meetings left before the next Fed Chair takes over in early 2026, a transition that may bring a different policy tone depending on the incoming administration’s preferences.
US Economic Backdrop: Stronger Than Australia’s Heading into 2026
Despite policy disagreements, the Fed’s economic outlook remains comparatively upbeat:
- GDP growth for 2026 projected at 2.3%
- Inflation is easing but still elevated
- Labour markets remain resilient, though unofficial data hints at softening ahead
Even allowing for risks, the US economy continues to outperform Australia, with higher growth, lower inflation and a more stable consumer sector.
Australia, by contrast, still faces the sharper household impact of high interest rates, especially across mortgage-heavy eastern states.
Treasury Purchases Resume
In a less-publicised move, the Fed confirmed it will begin buying Treasury securities again, starting with $40 billion in Treasury bills and continuing at elevated levels for several months.
This signals a desire to stabilise funding conditions, and a more cautious approach to liquidity as the Fed manages the next phase of policy normalisation
Why This Matters for Australian Borrowers and Investors
The Fed’s message is clear: global easing cycles will be slower, more data-driven, and considerably more conservative than markets expected at the start of 2025.
This matters for Australia because:
- Australian interest rates rarely diverge meaningfully from US policy
- Slower US cuts typically push out the RBA’s own easing timeline
- A stronger US dollar tightens global financial conditions
- The US economy is entering 2026 with more momentum than Australia
All of this shapes how quickly Australian households, businesses, and property markets will feel rate relief.
Why It Matters Now
The Fed’s latest move may be a rate cut, but it’s not the beginning of a rapid easing cycle. It’s a controlled adjustment designed to give policymakers breathing room amid uncertain data and a divided committee.
For Australia, the key message is clear: global policy settings are shifting toward neutral, not toward aggressive stimulus. Until inflation convincingly breaks lower, borrowers and investors should expect a slower, more uneven road to rate relief, both in the US and at home.
