New Economic Reality Takes Hold as Inflation Persists and Rates Rise

The Federal Reserve's interest rate hike reflects a new economic reality characterized by sticky inflation and faster growth. Despite repeated shocks, including the Iran war driving up oil and gas prices, and supply chain bottlenecks, the economy is growing steadily. In fact, economists believe it may even be accelerating.

One reason for this shift is the AI buildout, which has struggled with insufficient supplies of computer chips, electronic equipment, and workers to put everything together. This has led to a structural transformation of the economy, resulting in higher inflation and interest rates.

The average 30-year mortgage rate reached 6.95% last week, the highest in over a year and a half. This is a far cry from the low interest-rate era that lasted nearly 15 years after the Great Recession, when mortgage rates fell into the 3% range or even lower.

Economists attribute this change to a shift from the pre-pandemic economy, where consumer and business demand was weak, to the current economy, where healthy consumer and business spending is colliding with supply shocks and bottlenecks. As a result, investors are demanding higher interest rates on longer-term Treasury bonds, such as the 10-year bond, which has topped 5% this year for the first time since 2023.