Fed Rate Hike Signals Shift to Higher-Interest Economy

The Federal Reserve's recent interest rate hike reflects a significant shift in the global economy. For nearly 15 years after the Great Recession, the world experienced low interest rates and low inflation. However, this era has come to an end as the economy transitions into a higher-priced, higher-rate environment.

The average 30-year mortgage rate reached 6.95% last week, the highest in over a year and a half. Joe Brusuelas, chief economist at RSM, attributes this change to a structural transformation of the economy. The pre-pandemic economy was characterized by weak consumer and business demand, whereas today we see healthy spending colliding with supply shocks and bottlenecks.

The AI buildout has struggled with insufficient supplies of computer chips, electronic equipment, and workers. As a result, companies are competing for bonds, leading to higher longer-term interest rates on government bonds. The yield on the 10-year Treasury bond topped 5% this year for the first time since 2023.