US Economy Shifts to Higher-Rate, Higher-Priced World Amid AI Boom

After nearly 15 years of low interest rates and low inflation following the Great Recession, the US economy is shifting towards a higher-priced, higher-rate world. The Federal Reserve's recent rate hike to 3.9% reflects this new reality, where consumer and business spending collide with supply shocks and bottlenecks.

The shift from pre-pandemic economic conditions to the current state has led to a regime change in inflation and interest rates, according to Joe Brusuelas, chief economist at RSM. The economy's expansion is 'imbalanced' and entirely dependent on the AI buildout and strong spending by wealthier consumers.

The average 30-year mortgage rate reached 6.95% last week, the highest in over a year and a half, after falling into the 3% range in the 2010s and even lower during COVID-19. Higher oil and gas prices due to the Iran war, as well as an insufficient supply of computer chips, electronic equipment, and workers for AI projects, are contributing to higher inflation.

Federal Reserve Chairman Kevin Warsh highlighted this shift at a speech last month, noting that times have changed from the post-2008 era when there was excess capital on the sidelines due to limited investment opportunities. Now, ever-expanding pools of capital are pouring into AI-related infrastructure.