The Fed's long-term interest rate problem

The relentless rise in long-term interest rates is starting to have effects on more parts of the economy, Kansas City Fed president Jeff Schmid told Axios Thursday.

• “You’re starting to see some friction in some of the long-market users of credit,” he said, pointing to multifamily housing and commercial lending.

• “Even on the mortgage rate side, it’s starting to affect home prices, which is how the price of credit works relative to valuation,” Schmid said at a conference on investing in rural America hosted by the Federal Reserve Bank of Richmond in Asheville, N.C.

The big picture: Schmid spoke alongside Richmond Fed president Tom Barkin and Boston Fed president Susan Collins, who weighed in on the forces driving the rise in borrowing costs.

• “I think you’re seeing this trillion-dollar AI buildout, and I think it’s not surprising that rates go up if you’ve got a lot more demand out there,” Barkin added.

Collins said AI investment is also helping drive the solid economic growth that has persisted despite higher borrowing costs.

• “I think it does have broader effects, not just in particular sectors,” Collins said. But it “remains to be seen” whether investment will continue at its current pace, she added.

The intrigue: Schmid likened the Fed’s challenge of separating strong demand from supply-driven inflation to a seven-layer dip — one of his favorite foods.

• “The beauty of a seven-layer dip is you have equal amounts of beans and sour cream,” Schmid said. Right now, with AI and data centers, “there’s too much beans in that dip,” he added.

• “And not enough chips!” quipped Barkin.

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