The economy has undergone a structural transformation that ended the low-cost era. 'The regime change in inflation and interest rates is the outcome'

President Donald Trump lashed out at the Federal Reserve after it lifted its benchmark rate Wednesday. But economists say the bigger story is not the Fed’s latest move. It is a wider shift in the economy that is pushing borrowing costs up and keeping them there.

The old setup was built on weak demand, cheap money and very little inflation. That world lasted for years after the Great Recession and even into COVID. Now the picture looks different: spending is solid, inflation is still hanging around, big tech is throwing money at AI data centers, and the federal government is running large yearly deficits. Put those together and long-term rates keep facing upward pressure.

Mortgage borrowers have already felt it. Rates that sat in the 3% range in the 2010s, and even lower during the pandemic, are long gone. The average 30-year mortgage rate hit 6.95% last week, its highest level in more than a year and a half. The 10-year Treasury bond also topped 5% this year for the first time since 2023, before the Fed’s Wednesday hike.

Joe Brusuelas, chief economist at RSM, called it a structural transformation. He said the economy has moved from a period of weak consumer and business demand to one where healthy spending is colliding with supply shocks and bottlenecks. He pointed to higher oil and gas prices tied to the Iran war, plus shortages of chips, electronic equipment and workers for the AI buildout.

That buildout has become the center of gravity. After years when companies like Alphabet’s Google and Meta’s Facebook were sitting on piles of cash, those stockpiles are now going into AI infrastructure, with more borrowing on top. Federal Reserve Chairman Kevin Warsh said much the same at Jackson Hole last month, describing “ever-expanding pools of capital” pouring into AI-related infrastructure. Meanwhile, inflation has outpaced wage growth for five straight months, and that is the kind of arithmetic that keeps households angry even when GDP looks fine.