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After Jackson Hole: Are We Seeing a Return to the Era of High Interest Rates?

By Prof. Khalid Wassef Al-Wazani

Professor of Economics and Public Policy

Mohammed Bin Rashid School of Government

One of the paradoxes of economics and politics is that US President Donald Trump, who has made no secret since taking office of his desire for lower interest rates, chose Kevin Warsh to chair the Federal Reserve in the hope that a new era more inclined toward rate cuts would begin, bringing down the cost of borrowing and financing for businesses and individuals alike. Yet, only a few months later, the situation appears almost paradoxical. Warsh now finds himself facing pressures pushing in the opposite direction, some of them stemming from the policies of the US administration itself, particularly tariffs and trade tensions, alongside higher energy prices and widening uncertainty across the global economy.

Against this backdrop, this year’s Jackson Hole gathering was more than the annual meeting of central bankers. It may well have signaled the beginning of a new monetary era. Warsh’s message was clear: inflation remains higher than it should be, the Federal Reserve’s 2% target remains firm, and if inflation does not move toward that target quickly enough, “there is work to be done.” Markets interpreted this as a signal that the possibility of further interest-rate increases is no longer remote. The numbers help explain the concern. Inflation, as measured by the Personal Consumption Expenditures (PCE) price index, the Federal Reserve’s preferred gauge, stood at around 3.7% in July 2026, while core inflation was 3.3%, both well above the 2% target. US interest rates currently stand in a range of 3.50% to 3.75%. Ahead of the Jackson Hole meetings, financial markets had been pricing in an interest-rate increase of around 40 basis points in September, with expectations rising further following Warsh’s remarks.

But the problem may extend beyond monetary policy itself. Tariffs, which have become one of the principal instruments of the Trump administration’s economic policy, have raised the cost of bringing many goods into the US market. Following a long series of legal and trade adjustments, the average effective US tariff rate remains substantially higher than it was before 2025. The effective tariff rate was around 2% at the beginning of 2025, rising to approximately 11% by April 2026, according to data reported by Axios, while more recent estimates point to still higher levels following subsequent changes. Tariffs are, ultimately, a tax on trade, and a significant part of their cost is borne by consumers and businesses through higher prices and production costs. Trade policy therefore becomes part of the inflation problem. And here lies another paradox: an administration seeking lower interest rates is simultaneously pursuing policies that may make lowering those rates more difficult.

“America First” policies may be understandable from the perspective of protecting domestic industry and safeguarding economic security, but they are not necessarily friendly to inflation, global trade, or even allies and economic partners. Add geopolitical tensions, higher energy prices and disruptions to global supply chains, and the Federal Reserve’s task becomes considerably more complicated. There is also a powerful new variable entering the equation: artificial intelligence. AI is expected to raise productivity and reduce costs over the long term, but in the short term it has unleashed an enormous investment wave in data centers, semiconductors, computing capacity, energy and infrastructure. The rapidly growing demand for financing these investments, particularly in the US market, could itself provide additional upward pressure on borrowing and financing costs. Paradoxically, the technology that may reduce costs tomorrow could today be one of the forces increasing demand for both capital and energy.

The other important message emerging from Jackson Hole may be that we are witnessing the end of the era of monetary certainty. Federal Reserve Chair Kevin Warsh does not appear enthusiastic about excessive reliance on “forward guidance,” through which financial markets had grown accustomed to receiving relatively clear advance signals about the likely direction of interest rates. This could mean that investors, governments and businesses are entering a period in which uncertainty over the cost of money becomes a permanent feature of the economic landscape. And what happens in the United States will not remain confined there. In the global economy, Federal Reserve decisions do not need a passport to cross borders. Higher US interest rates mean higher financing costs globally, greater pressure on debt servicing, and significant implications for capital flows, investment and exchange rates.

For economies operating fixed or managed exchange-rate arrangements linked to the US dollar in varying forms, around 38 economies, these developments become even more consequential. Persistently high global interest rates translate into higher financing costs, more expensive debt servicing and greater pressure on private investment. This applies, to varying degrees, to several Arab economies, particularly at a time when many countries in the region require massive investment in infrastructure, energy and technology. Jackson Hole may not have declared that another interest-rate increase is inevitable. But it may have left us with a more consequential message: the era of cheap money and monetary certainty may now be behind us. The question economies should be asking is therefore no longer simply: When will the Federal Reserve cut interest rates?

The more important question is: How do we prepare for a world in which higher interest rates, and uncertainty over their future direction, become part of the new economic reality?.

Prof. Khalid W. Al Wazani