Rates Rise. US Politics Shifts. What Happens Next?

Within 24 hours, two very different events gave Australian investors something to think about. On Melbourne Cup Day, the RBA lifted the cash rate to 4.85%, its highest level since 2008. The next day, American voters returned both the House and the Senate to Democratic control in emphatic style. The two events reach your finances by different routes: the rate rise through your mortgage and savings, and the US result through your super and investment portfolio. Here’s what each means for you.

Rate Rise: good for savers, tough for borrowers

The 25-basis-point rise was the RBA’s fifth this year, and the 6 to 3 vote shows how finely balanced the decision was amongst the board. The more telling signal was the board’s forecast that inflation won’t fall below 3% until late 2027, about nine months later than it previously expected. That is why Governor Michele Bullock left the door open to further rises. For savers, this is welcome news, cash and term deposits now pay a meaningful return. For mortgage holders and property investors with large loans, it cuts the other way. Repayments are climbing just as house prices have fallen, eroding net rental returns and lowering the outlook for capital growth.

US Midterms: less change than the headlines suggest

The election result came as little surprise. Prediction markets and pollsters had tipped a Democratic sweep as the most likely outcome, and history leaned the same way. Between 1934 and 2022, the president’s party lost an average of 27 House seats at the midterms. Voters often use these elections to put a check on whoever holds the White House, and turnout tends to favour the side out of power. What changes now is the balance of power, not the direction of policy. President Trump keeps his veto and executive powers, so a Democratic Congress can slow and scrutinise his agenda but not unwind it. Overriding a veto takes a two-thirds majority in both chambers, which is well out of reach. Congress’s real leverage lies in its control of the budget and its power to investigate. Expect more hearings, more subpoenas and tougher stand-offs over funding deadlines, which raises the risk of government shutdowns. Major new legislation from either side is now unlikely.

Made in America, held in Australia

Most Australians own more of America than they realise. The average industry super fund growth option holds around 30% in international shares, usually through index strategies tracking benchmarks like the MSCI All Country World Index and the S&P 500. The US makes up roughly three-quarters of the developed-world index, so “international” largely means “American”. That exposure has paid off: in FY26, international shares returned around 25.5%, against 6.2% for Australian shares. However, there are three places where you might feel a slight correction:

· US tech. A Democratic Congress is likely to push harder on AI regulation, including safety, energy use and labour impacts. A handful of US tech giants carry heavy index weights, so this reaches you through super and global ETFs.
· ASX companies with US earnings. Several of our largest healthcare names earn much of their revenue in America. Any extra scrutiny of healthcare pricing is worth watching.
· Bonds. Funding slowdown could keep US Treasury yields volatile. Australian yields often follow, which matters for the defensive side of your portfolio.

Gridlock: a good thing?

Supporters of the result argue that divided government restores checks and balances, while critics warn of gridlock and the risk of shutdowns. Markets tend to tolerate the latter, when little passes, little breaks. What they dislike is uncertainty, and the decisiveness of the outcome cleared much of it away in a single night. After an early dip in futures, US shares rallied, the Dow Jones rose about 3% and the S&P 500 about 1.8%. History offers further encouragement. Since 1950, the S&P 500 has risen in the 12 months after every one of the 19 midterm elections, by an average of roughly 15%.

Your budget vs your balance

If you have a mortgage or rely on interest from your savings, the RBA’s decision will have a bigger bearing on your monthly budget than anything in Washington. For the growth side of your wealth, your share portfolio and super, the US result is likely to matter more over time. Neither calls for dramatic moves, but both are worth watching. Review your portfolio regularly, make sure you’re well diversified, and with rates higher than usual, check that your cash is working as hard as it can. Rate decisions and elections make plenty of noise, but fundamentals are what pay the bills.

Wondering what these developments mean for your wealth? Let’s start a conversation about your investment strategy and long-term goals.