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Many economists describe the U.S. as multispeed: booming investment in artificial intelligence and a resilient job market on one hand, and a slump in interest-rate-sensitive sectors like housing on the other. And inflation remains brisk, with spiking energy prices driven by Middle East turmoil now in the mix.
Given those price pressures, writes economist John Diamond of Rice University, the Federal Reserve didn’t have much of a choice in its unanimous Wednesday decision to raise its benchmark interest rate by a quarter-percentage point. But the decision also points to a more basic tension: Policymakers can decide to make borrowing more expensive to counteract high prices, but they can’t do much about which sectors will be most affected.
Most notably, investment in AI isn’t likely to let up, because investors still expect exorbitant returns. But for consumers looking to buy homes or pay down credit card debt, the rate hike signals fresh Fed concern over inflation persistence, making more increases likely. Consumer borrowing across the board will get pricier.
“The U.S. economy is facing a reality in which both short- and long-term rates stay higher for longer,” concludes Diamond. “The federal government, households and businesses are all adjusting to a borrowing environment that looks substantially different from the one that prevailed for much of the previous decade.”
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