Fed Funds vs RBA Cash Rate

The Federal Funds Rate (FRED series FEDFUNDS) is the monthly average of the effective rate at which depository institutions trade federal funds with each other overnight, fixed within the FOMC target range that has stood at 3.50% to 3.75% since the December 2025 meeting. The RBA Cash Rate Target (RBA series FIRMMCRT, table F1.1) is the rate the Reserve Bank Board sets for unsecured overnight loans between banks in the cash market, the operational tool the RBA uses to deliver its 2% to 3% inflation target.

The two rates are decided on different calendars: the FOMC meets eight times a year, while the RBA Monetary Policy Board meets nine times a year, with the post-2024 reforms moving Australia from eleven meetings annually to nine plus quarterly Statement on Monetary Policy releases. The Fed-RBA spread is calculated as fed funds minus the cash rate target. As of April 30, 2026 the spread is between negative 35 basis points (fed funds at 3.75% minus cash rate at 4.10%) and negative 60 basis points (fed funds at 3.50% minus 4.10%), the deepest negative US-Australia gap since the 2010 to 2013 mining boom era.

The configuration in April 2026 is the cleanest divergence between the two central banks in more than a decade. The April 29 FOMC statement retained language pointing to a final cut later in 2026, but Governor Miran voted for an immediate 25 basis point reduction and three other voters dissented against the cut-bias language, producing the 8-4 split. The March 2026 SEP median has fed funds at 3.10% by year-end 2026, implying one to two cuts of 25 basis points.

The RBA went the other way. In February 2026 the Board lifted the cash rate target by 25 basis points to 3.85%, citing inflation that had picked up materially in the second half of 2025 and a labor market still operating at full employment. The March 2026 vote was 5-4 in favor of a further 25 basis point hike to 4.10%, with the four dissenters preferring to hold. The driver was a Q4 2025 trimmed-mean CPI reprint at 3.4% year-over-year, well above the 2% to 3% RBA target band, combined with services inflation that had reaccelerated rather than continuing to ease.

Australia's terms of trade are dominated by iron ore, coking coal, LNG, and base metals shipped predominantly to China, with mining alone contributing roughly 14% of Australian GDP and over 50% of goods exports. When Chinese steel demand or property completions weaken, RBA policy responds faster and harder than the Fed because the income shock flows through Australian fiscal receipts and household consumption within two to three quarters. The 2015 to 2016 China growth scare drove the RBA to 1.50% while the Fed had already started its 2015 to 2018 hiking cycle, producing a negative 100 to negative 125 basis point Fed-RBA spread.

The inverse pattern held in 2026. Iron ore averaged $108 per metric ton in Q1 2026 versus $95 the year before, and Australian mining capex returned to growth after two years of contraction. The RBA noted in its March Statement on Monetary Policy that resource-sector activity was running above the staff's December projections, contributing to the inflation reacceleration that prompted the February and March hikes. Reading the Fed-RBA spread without the iron ore overlay misses the dominant transmission channel: the spread is sensitive to Chinese demand for Australian commodities in a way the Fed's reaction function never is.

AUD/USD traded at $0.7193 on April 27, 2026, a fresh four-year high, with the four-year prior low of $0.6270 hit in November 2024 when the Fed-RBA spread was at positive 110 basis points. The recovery in AUD/USD tracks the spread's move from positive 110 basis points to negative 35 to 60 basis points over 17 months, almost mechanically: every 25 basis point compression in the Fed-RBA differential has produced roughly a 1.5% to 2% AUD/USD appreciation over the subsequent month, consistent with the standard carry-trade transmission lag.

The carry trade math is straightforward. A leveraged short USD long AUD position earns the cash rate target minus fed funds plus AUD/USD spot return. At negative 60 basis points spread, the carry leg pays roughly 60 basis points annualized before transaction costs. Compounded across 12 months with currency appreciation, the trade has returned approximately 14% on an unlevered basis from the November 2024 trough through April 2026. The 12-month forward implied AUD/USD prices the differential persisting through Q1 2027, suggesting markets do not expect rapid Fed-RBA convergence.

The negative 35 to negative 60 basis point Fed-RBA spread in April 2026 is the deepest US-Australia gap since 2014, when the post-GFC recovery saw US fed funds at 0.0% to 0.25% while Australia's cash rate target sat at 2.50%, producing a negative 225 to negative 250 basis point spread. The 2003 to 2008 mining boom drove an even more extreme configuration: by July 2008, Australia's cash rate hit 7.25% while US fed funds had been cut to 2.0%, a negative 525 basis point spread that drove AUD/USD to its all-time high of $1.1080 in July 2011 once the GFC reset the relative trajectories.

The inverse episode came in 2018 to 2019. Fed funds peaked at 2.25% to 2.50% in December 2018 while the RBA cash rate sat at 1.50%, then fell to 0.75% by October 2019 as Australian housing weakness and weak wage growth forced the RBA to cut against the Fed. The positive 75 to positive 175 basis point Fed premium drove AUD/USD from $0.81 to $0.67 over 24 months. Each spread regime took approximately three to five years to fully unwind, suggesting that the current 2026 configuration is closer to the start of the next AUD strength cycle than to its end.

The Fed-RBA spread is most informative when read alongside two non-policy inputs. The first is the RBA's preferred underlying inflation measure, the trimmed-mean CPI published quarterly by the ABS (catalogue 6401.0). When trimmed-mean prints above 3.0% year-over-year, the RBA reaction function leans hawkish even with weak headline labor data; when it prints inside the 2% to 3% band, the RBA usually defaults to the Fed's path. The Q4 2025 reprint at 3.4% was the trigger for the February 2026 hike that began the current divergence.

The second is the Caixin China Manufacturing PMI, which leads Australian export volumes by approximately three to four months. A Caixin print sustained above 51 supports continued RBA hawkishness through the iron ore channel; sustained sub-49 prints historically precede RBA cuts within six to nine months as the income shock transmits to domestic demand. The Caixin print averaged 50.8 in Q1 2026, consistent with continued but not accelerating support for Australian exports. Reading the Fed-RBA spread, trimmed-mean CPI, and Caixin PMI together gives a sharper picture of whether the divergence will persist or reverse than tracking the policy rates alone.