The New Normal May Be Higher Interest Rates

Global interest rates are entering a "new normal" of structural elevation, driven by a fundamental shift from a surplus of savings to a dearth of capital. Tom Orlik, Chief Economist for Bloomberg Economics, argues that the era of "cheap money" has ended as the demographic tailwinds of working baby boomers and the post-Cold War peace dividend reverse into retirement spending and surging defense budgets. Furthermore, the massive capital requirements for AI infrastructure and persistent inflation—exacerbated by conflict in Iran—are maintaining upward pressure on bond yields. This transition leaves governments and households struggling with a massive debt burden accumulated during the low-rate era, with U.S. interest payments now consuming half of the budget deficit. Consequently, Federal Reserve Chair Kevin Warsh faces a critical credibility test at the upcoming meeting, caught between market expectations for a rate hike and intense political pressure from the White House to lower borrowing costs.