Federal Reserve rate hike reflects new world of sticky inflation and
faster growth
[September 21, 2026] By
CHRISTOPHER RUGABER
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.”
Companies and government are competing for bonds
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
economy — are still spending at a healthy pace. A recent report showing
that retail sales picked up last month led economists at Bank of America
to forecast growth will reach a healthy 3% at an annual rate in the
July-September quarter.
Federal Reserve Chairman Kevin Warsh highlighted the shift in a speech
at the central bank's annual conference in Jackson Hole, Wyoming last
month.
[to top of second column] |
Federal Reserve Board Chairman Kevin Warsh speaks during a news
conference at the Federal Reserve in Washington, Wednesday, Sept.
16, 2026. (AP Photo/Mark Schiefelbein)
 After 2008, “it was a widely held
view that an excess of capital would sit on the sidelines for a
long, long time, because there just wouldn’t be enough compelling
investment opportunities,” Warsh said. “All the good stuff had been
invented. So growth would be low and slow.
“Well, times sure have changed,” he continued. “Ever-expanding pools
of capital are pouring into AI-related infrastructure of all sorts.”
The additional spending and investment has contributed to higher
longer-term interest rates on government bonds that are competing
for lenders. The yield on the 10-year Treasury bond topped 5% this
year for the first time since 2023, even before the Fed raised its
benchmark short-term rate Wednesday.
At the same time, 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. Even as the economy expands, inflation has
outpaced the annual growth in average wages for the past five
months.
Brusuelas said the U.S. economy's expansion is “imbalanced” with
growth “entirely dependent” on the AI buildout and strong spending
by wealthier consumers, who have benefited from rising stock prices
driven by hopes that AI will lift profits.
Higher inflation leads to higher rates
After the Fed lifted its rate to 3.9% Wednesday, Trump said on Truth
Social that U.S. rates should be 1% instead.
Yet many of Trump's policies have contributed to higher borrowing
costs, in particular the Iran war that has driven up gas prices.
When inflation persists, investors demand higher interest rates on
longer-term Treasury bonds, such as the 10-year, which strongly
influences mortgage rates.
“The president can say he wants interest rates lower all he wants,
and yet he continues to push the button on all the policies that
raise rates," said Elizabeth Pancotti, vice president of policy,
advocacy and research at the progressive Groundwork Collaborative.
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