Rates will keep going up for one major reason related to the AI boom, a top economist says

Torsten Sløk says the path forward for interest rates is up, and you can thank AI companies that are largely insulated from the surge in borrowing costs.

The chief economist at Apollo Global Management said on Thursday that interest rates aren’t likely to come down while AI capex continues to boom. That’s because AI returns are still expected to be greater than the fed funds rate.

“The implication for investors is that upward pressure on rates persists until either the Fed raises rates above expected AI returns, or expected AI returns fall below the Fed funds rate,” Sløk wrote in a blog post on Thursday.

Sløk noted that long-term borrowing costs have increased over the past year, with 10-year treasury yields up by about 125 basis points. However, Wall Street analysts have only continued to increase their capex views for 2027.

In Sløk’s view, Wall Street is convinced that the payoff from the buildout of AI data centers, chips, and infrastructure will justify the monumental capex figures, and Big Tech’s borrowing spree is wholly undeterred by rising rates.

“The reason is that many AI investors expect AI investments to return more than 10%, well above the 4% Fed funds rate,” he added. “With borrowing costs far below expected returns, the AI spending boom is not sensitive to interest rates, and tighter policy is losing its bite on the economy.”

Sløk recently speculated that interest rates could potentially hit their peak in the next month, primarily due to an improving outlook for the oil market.

And while he maintains that the prospect of a peace deal in the Middle East could serve to temporarily ease inflation fears as Treasury yields fall, he still doesn’t see that solving the bigger problem brewing in the bond market.

“The fundamental direction of travel for rates remains higher, especially with ongoing fiscal challenges and heavy Treasury issuance adding to the term premium,” he stated. “The bottom line for both public and private markets is that higher for longer continues.”