Higher interest rates will make life harder for workers, not investors
by Peter Morici · The Washington TimesOPINION:
Federal Reserve policymakers at their Sept. 16 meeting raised the Fed’s overnight borrowing rate by a quarter point. More rate hikes are likely, as the Fed tends to follow markets rather than lead them.
Headline inflation is 3.4%, and the core rate, which excludes food and energy, is 2.4%.
With the Houthis grabbing the Bab el-Mandeb Strait and shipping through the Strait of Hormuz severely restricted, energy producers are developing expensive alternative supplies beyond the Persian Gulf.
People were interested in these podcasts
Pricey diesel pushes up costs in transportation, agriculture, construction and mining. The artificial intelligence boom is accelerating demand for semiconductors, copper, building materials and skilled workers, such as electricians.
President Trump’s tariffs and deportations continue to boost costs and prices too.
Although Democrats may be critical of his unilateral moves, they tend to be equally protectionist when in power. President Biden placed a 100% levy on Chinese electric vehicles, for example.
The data center boom is financed by both the cash flows of chip manufacturers such as Nvidia and hyperscalers such as Meta and Google, and by aggressive borrowing. Along with large federal government financing requirements, these have pushed up the rate on the bellwether 10-year Treasury to about 5% from about 4% in September 2025.
The fuel purchases of American drivers and commercial customers are not big enough to move international oil markets.
Advertisement Advertisement
The major players in the AI boom — developers such as Anthropic and OpenAI, and the hyperscalers — understand that China is pushing ahead, that the U.S. lead is short and that the country simply cannot afford to let up.
Consequently, the burden of higher interest rates will be felt through lower housing and auto sales, fewer investments by manufacturers and other businesses outside the AI orbit, and higher consumer credit card costs.
Interest rates for corporate bonds and mortgages are rising in step with Treasury rates, and terms on auto loans and credit cards will soon be affected.
Many middle-market and starter homes just became less valuable. Federal government borrowing costs will rise.
The Treasury has been buying up its longer-term bonds and financing that with sales of short-term notes.
Advertisement Advertisement
That can reduce the government’s interest costs a bit because short rates are lower than long rates, but that maneuver has its limits.
Overall, a permanent increase across the spectrum of Treasury rates will put new pressure on the federal finances.
Democrats appear set to take over the House and perhaps the Senate, and they have ambitious goals: expanding federal support for healthcare and other social programs, even as a widening federal deficit will require higher taxes.
Mr. Trump could prove a mighty obstacle.
Advertisement Advertisement
Fed Chair Kevin Warsh — noting that unemployment is only 4.1%, job openings are robust and new unemployment insurance claims are subdued — says the labor market is in good shape.
With aggregate demand growing much more rapidly than aggregate supply — about 8% versus 2% — monetary policy hardly appears tight, and more Fed interest rate increases lie ahead. The projections from individual members of the Federal Open Market Committee indicate they anticipate at least one more quarter-point rate increase.
Mr. Warsh does not believe the Fed’s mandates to accomplish both price stability and full employment are in fundamental conflict.
In the long run, that is certainly true.
Advertisement Advertisement
Inflation distorts economic decision-making — most important, business investment decisions — and a stable price environment would maximize growth and create good employment opportunities.
Still, we live in the short run, not on university blackboards, and the labor market is much more fragile than Mr. Warsh perceives or is willing to acknowledge.
About 27% of the unemployed have been searching for more than six months, up from about 20% just before COVID-19. The average duration of unemployment for job seekers has also risen to six months.
That explains why workers are not job-hopping so much these days.
Advertisement Advertisement
For those who think they are in secure positions, the enticement of a raise entails considerable new risks. That is bad for economic growth because when locked in, folks do not realize their full potential.
Cracking inflation that has so many external instigators — global conflicts and petroleum prices, great-power competition in AI, tariffs and deportations that limit the supply of skilled workers — will take much more than another rate increase.
Labor markets are not a source of inflation. Wages are hardly keeping pace with inflation. Still, the burdens and numbers of long-term unemployed will grow as Mr. Warsh ratchets up interest rates to accomplish price stability.
Stubborn inflation and higher interest rates will not necessarily be bad for stock prices and investors. A 10-year Treasury rate just above 5% would align with the S&P 500’s earnings-to-price ratio, which is slightly above 5%.
The outlook for profit growth remains good.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
Follow the author
Peter Morici
Follow author updates Follow Click to follow. Manage followed authors