The forces keeping US interest rates elevated increasingly extend beyond decisions made inside the Federal Reserve. Strong consumer demand, heavy corporate investment, persistent inflation and government borrowing are putting upward pressure on the cost of capital across the economy.
The Federal Reserve raised its target range by 0.25 percentage points to 3.75% to 4% on September 16, saying economic activity remained solid while inflation was still elevated. The move adds to evidence that the exceptionally cheap borrowing conditions that followed the global financial crisis are no longer a useful baseline for households or businesses.
AI Spending Adds a New Source of Demand for Capital
One important change is the scale of investment now taking place across corporate America. Technology companies are committing large sums to data centres and other infrastructure needed to support artificial intelligence, creating demand for equipment, construction capacity, energy and financing.
That marks a contrast with much of the period after the 2007-09 financial crisis. Households spent years repairing their balance sheets, while many large companies accumulated cash amid relatively modest investment demand. Weak demand for capital helped create conditions in which interest rates could remain unusually low.
That environment has changed. Consumers continue to spend, businesses are investing and the federal government is also borrowing heavily. Together, those demands increase competition for available capital and can contribute to higher yields in the bond market.
Joe Brusuelas, chief economist at RSM, described the change as a structural shift in the economy, arguing that stronger demand is now colliding with constraints on supply. The source report also points to energy costs and shortages of chips, electrical equipment and skilled workers as pressures affecting the current investment cycle.
For borrowers, the consequences are already visible. Mortgage costs are far above the levels seen during the 2010s and the pandemic period, making financing significantly more expensive for households entering the property market.
The Fed Sees Inflation Staying Above Target in 2026
The central bank’s own projections illustrate why a rapid return to the previous rate environment cannot be assumed. Federal Reserve officials’ September forecasts put 2026 personal consumption expenditures inflation at a median 3.7%, compared with the central bank’s longer-run 2% objective. The median projection falls to 2.3% in 2027 and 2.1% in 2028.
That provides important context for investors. The debate over borrowing costs is not simply about whether the Fed raises or lowers its overnight policy rate at a particular meeting. Longer-term rates also incorporate expectations for inflation, economic growth and the amount of capital being sought by governments and companies.
The Federal Reserve’s September projections also show policymakers estimating a median federal funds rate of 4.1% at the end of 2026, although individual forecasts vary and are not commitments to a predetermined path.
This distinction matters for property, private equity and other sectors that became accustomed to financing deals at exceptionally low rates. If stronger investment demand and persistent inflation keep longer-term yields elevated, asset valuations and transaction economics may need to accommodate a higher cost of capital even after future Fed cuts.
Higher Rates Are Becoming a Business Planning Assumption
The next test will be whether inflation cools while investment and consumer demand remain strong. The Fed’s September statement said domestic spending had remained resilient and capital investment was robust, while acknowledging continued uncertainty from geopolitical developments.
Attention will now turn to incoming inflation data and the Federal Reserve’s October 27-28 meeting. For investors and corporate borrowers, however, the broader question is larger than the next policy decision. A sustained rise in demand for capital could mean financing costs remain structurally higher than they were during the decade following the financial crisis.
