Federal Reserve rate hike reflects new world of sticky inflation and faster growth

WASHINGTON (AP) — President Donald Trump has renewed his attacks on the Federal Reserve after it hiked its benchmark interest rate Wednesday, but the Fed matters less than broader economic trends when it comes to longer-term borrowing costs, economists say. The economy is growing steadily despite being hit with repeated shocks — and may even be accelerating — while inflation remains stubbornly high. And big tech firms are borrowing huge amounts of cash to plow into data center construction while the federal government is still running large yearly budget deficits.

All these trends point to higher interest rates regardless of what the Fed does, analysts say. As a result, the low interest-rate, low-inflation world that lasted for nearly 15 years after the Great Recession is over and a higher-priced, higher-rate world is taking its place. Mortgage rates fell into the 3% range in the 2010s and even lower during COVID-19, but such deals are long gone.

The average 30-year mortgage rate reached 6.95% last week, the highest in more than a year and a half. Joe Brusuelas, chief economist at RSM, a tax consulting firm, said that a big reason for the change is a shift from the pre-pandemic economy in which consumer and business demand was weak, to the current economy in which healthy consumer and business spending is colliding with supply shocks and bottlenecks. In addition to higher oil and gas prices because of the Iran war, the AI buildout has struggled with an insufficient supply of computer chips, electronic equipment, and workers to put it all together.

“We’ve undergone a structural transformation of the economy,” Brusuelas said. “The regime change in inflation and interest rates is the outcome.” Back to the future The shift, in many ways, returns the economy to where it was before the financial crisis in December 2007 that lasted through June 2009. But even after the downturn ended, consumer and business spending remained weak.

Millions of Americans in the 2010s focused on paying down outsized mortgages and credit card debt instead. Businesses saw few investment opportunities, and many big tech firms such as Alphabet’s Google and Meta’s Facebook piled up cash. Now those companies are using those stockpiles to build out AI data centers, and are borrowing even more money to do so.

And American consumers — despite surveys finding they are pessimistic about the econ…