US Interest Rates Soar, Hitting Housing Market and Fiscal Policy

The era of cheap borrowing and abundant capital has come to an end, at least for now. The surge in interest rates is a result of the Federal Reserve's efforts to control inflation amid a growth boom, but it may not be enough to deter the voracious capital needs of AI giants and the US government.

The 30-year fixed-rate mortgage rate has risen to near 8% due to higher borrowing costs, making it difficult for people to buy houses. The housing market is expected to freeze up in the short term as prices adjust to the new reality.

Higher interest rates will also make America's fiscal situation more challenging, with debt service costs projected to reach $2 trillion by 2035 if sustained. The Congressional Budget Office estimates that a scenario where interest rates are 1 percentage point higher than baseline would result in public debt growing to 222% of GDP by 2056.

The Federal Reserve's leaders believe they have set their policy rates too low, and are now looking to adjust course with further rate hikes. This could lead to a rethinking of US government tax and spending policies as well as the price of assets in an era of steep global demand for capital.