Fed Rate Hike Reflects New World of Sticky Inflation and Faster Growth
The Federal Reserve's decision to raise its benchmark interest rate reflects a fundamental shift in the US economy, one characterized by sticky inflation and faster growth. Economists argue that the low-interest-rate, low-inflation world of the past nearly 15 years has given way to a higher-priced, higher-rate environment.
According to Joe Brusuelas, chief economist at RSM, this change is driven by a structural transformation of the economy. The pre-pandemic era saw weak consumer and business demand, but today we're witnessing healthy spending colliding with supply shocks and bottlenecks.
The Iran war has led to higher oil and gas prices, while the AI buildout struggles with insufficient computer chip supplies, electronic equipment, and workers. This perfect storm has pushed up inflation, which has outpaced average wages for five months.
As a result, companies are competing fiercely for bonds, driving up interest rates on government securities. The yield on the 10-year Treasury bond topped 5% this year for the first time since 2023.