In this week’s What We Are Working on video we discuss the RBA’s reaction function and a potential Fed regime change under new Chair Kevin Warsh with Christian Baylis at Fortlake Asset Management. We like talking to Christian every few months as the manages a go anywhere absolute return strategy and so is relatively unbiased but also a subject matter expert in rate markets. The quick take: the regime change at the Federal Reserve is bond-friendly at the long end and bond-unfriendly at the short, while the RBA's hard-won credibility leaves Australian rates biased higher for longer because the RBA is not quite incentivised enough to go too hard on inflation. For investors, savers and borrowers alike, the broad implications are that structurally higher real rates are here to stay, and portfolios built for the last decade, or even last few years, are miscalibrated for the next decade.

The fear before Kevin Warsh's first appearance was that he would validate the market's one-to-three-cuts narrative and, in doing so, surrender the Fed's inflation-fighting bona fides. The opposite happened. By signalling that he would be a tough cop on the beat and mentioning inflation far more often than employment, Warsh let the market do his heavy lifting for him. The long end rallied as inflation expectations re-anchored; the front end priced out the cuts. The result is a flatter curve and, paradoxically, a Fed that wants out of the business of micromanaging the economy. His ambitions for the balance sheet, weaning the banks off Fed support and breaking the dependency nexus, are the real regime change, and they will be tested if growth softens while he is still shrinking it.

The RBA's story rhymes. The Bullock-era board has drawn a deliberate line under the Lowe years: never again behind the curve. That pre-emptive instinct has served it well, but the price of credibility is a return to genuine data dependence, which forfeits first-mover advantage. The uncomfortable arithmetic is that inflation has overshot target for seven years. The price level is now far above where it should be, and taming today's inflation does nothing about that accumulated excess. The objectively hawkish answer is a higher cash rate; the likely answer in the real world is a more balanced tightrope, with a target not reached until the middle of 2028, a long forecast horizon for a central bank that, rightly, distrusts its own forecasts.

For Australian investors, this argues against reaching for duration as a risk-adjusted bet. Yields are tight and the curve is flattening, so the asymmetry is poor. The opportunity sits in idiosyncratic credit. Structurally higher rates are quietly euthanising businesses that failed to repair their balance sheets during the era of free money, printing names, disrupted payments operators, tariff-exposed logistics. These defaults are patchy, not correlated, and that is precisely the point: the environment rewards discipline and security selection over beta, with airbags in place for the day stress turns systemic.

For savers, the message is more cheerful than it has been in fifteen years, cash and term deposits finally pay something real, and that is unlikely to reverse in a hurry.

For borrowers, temper the hope of rapid relief. The cuts the mortgage market has been pricing in are, on this reading, optimistic. A balanced RBA that errs towards finishing the job means rates plateau rather than tumble.

The unifying theme: calibrate to higher-for-longer, not to a return to zero.