Higher Rates Take Hold as Economy Transitions from Low-Inflation Era

The Federal Reserve's recent interest rate hike reflects a significant shift in the global economy. According to Joe Brusuelas, chief economist at RSM, this change is due to a structural transformation of the economy, where consumer and business spending are colliding with supply shocks and bottlenecks.

This has led to higher inflation rates, which have outpaced the annual growth in average wages for the past five months. As a result, investors demand higher interest rates on longer-term Treasury bonds, such as the 10-year bond, which strongly influences mortgage rates.

The economy is growing steadily despite being hit with repeated shocks, and may even be accelerating, while big tech firms are borrowing huge amounts of cash to plow into data center construction. This has contributed to higher longer-term interest rates on government bonds that are competing for lenders.

Federal Reserve Chairman Kevin Warsh highlighted the shift in a speech at the central bank's annual conference in Jackson Hole, Wyoming last month. He noted that after 2008, it was a widely held view that an excess of capital would sit on the sidelines for a long time due to lack of investment opportunities.

However, times have changed, and ever-expanding pools of capital are pouring into AI-related infrastructure. This has led to higher interest rates despite the Federal Reserve's rate hike. Political polling and consumer sentiment surveys continue to find that many Americans are struggling to keep up with rising prices, and affordability remains a top concern heading into the midterm elections.