Fed Rate Hike Reflects New Economy of Sticky Inflation and Faster Growth

The Federal Reserve has hiked its benchmark interest rate to 3.9%, marking a significant shift in the economy from the low-interest-rate, low-inflation world that lasted for nearly 15 years after the Great Recession.

According to economists, the change is due to a structural transformation of the economy, where consumer and business spending are now strong but supply shocks and bottlenecks are causing inflation to persist. This has led to higher longer-term interest rates on government bonds, with the yield on the 10-year Treasury bond topping 5% for the first time since 2023.

Joe Brusuelas, chief economist at RSM, attributes this shift to a change in economic regime, where healthy consumer and business spending are colliding with supply shocks. He notes that companies such as Alphabet's Google and Meta's Facebook have stockpiles of cash they're using to build out AI data centers and borrow even more money to do so.

Federal Reserve Chairman Kevin Warsh highlighted the shift in a speech at the central bank's annual conference, noting that growth would be low and slow due to an excess of capital sitting on the sidelines. However, times have changed, with ever-expanding pools of capital pouring into AI-related infrastructure.