The age of abundance has come to an end—neither policy nor markets have kept pace with this shift. Last week, at the Jackson Hole symposium, the Federal Reserve Chair signaled that the next move in US interest rates is more likely to be upward than downward. He is not alone in this stance: the European Central Bank raised rates in June and may hike further, while several other central banks have adopted a more hawkish tone. This is indeed puzzling—economic growth is slowing, unemployment is rising, and core inflation across advanced economies is only slightly above target. Why is the global monetary trajectory turning toward tightening?
The official explanation is that these actions are designed to prevent expectations from shifting. Supply-driven inflation does not necessarily persist; it only becomes entrenched when businesses and households anticipate it and adjust wages and prices accordingly. Having previously misjudged the 2021 economic shock as temporary, central bankers are unwilling to risk repeating that mistake. Therefore, they are tightening not to eliminate the shock itself—since no interest rate tool can achieve that—but to stabilize expectations. However, this is only a small part of the problem.
Central banks are treating what is essentially an institutional transformation as a cyclical fluctuation. In the previous generation, advanced economies enjoyed abundant supply and plentiful capital: globalization kept commodity prices low, and a global savings glut reduced the cost of money, so monetary policy only needed to manage demand. Today, both conditions are reversing—supply is becoming scarce and costly, as is capital, and the two are interconnected. The consequences are severe. This type of inflation cannot be subdued through interest rates; it can only be addressed at the cost of a recession. The real cost of capital is rising persistently, not cyclically.
Investors accustomed to the old economic environment—those who expect central banks to ease during downturns, rely on government bonds to hedge equity risk, and anticipate real interest rates returning to historically low levels—are living in a world that will not revert to its former state. Supply conditions across all sectors have become strained. Just last month, the US imposed a 50% tariff on Canadian goods, and US forces struck Iranian launchers in the Strait of Hormuz, pushing Brent crude oil back above $90. All these factors drive up costs, and interest rate policy cannot resolve them. Additionally, a shrinking labor supply has exacerbated the situation. The government recently tightened immigration controls, even moving to revoke work permits for over one million people. This has reduced the available workforce in construction, agriculture, and services, thereby raising wage costs in these sectors.
This is not merely a temporary anomaly but a reflection of long-term trends. In fact, energy costs have risen steadily over the past 25 years, reaching historic highs, while "reshoring" strategies mean rebuilding supply chains at higher costs. Even before these measures were strictly enforced, demographic shifts had already made labor markets increasingly tight. The cheap and unimpeded labor supply of the globalization era is gone. The data confirms this. If US core inflation is split into demand-driven and supply-driven components, the demand-driven portion has fallen to around 1 percentage point, while supply factors account for nearly all inflation above target. Across G10 countries, core inflation rates are near target levels, with none exceeding 2.5%. The demand-side inflation that monetary policy can influence has already been contained. Wage growth is slowing, and market-based inflation expectations remain near target. The factors keeping inflation above target are supply-side issues.
Capital is also flowing in the same direction, so the investment boom is not as offsetting as it appears. Advanced economies are being called upon to make massive investments in artificial intelligence, energy transition, and defense—on a scale not seen in decades. At the same time, the savings resources to support these investments are shrinking, as the corporate sector has shifted from net lender to net borrower, and China is investing less of its surplus funds in Western assets. AI, rather than alleviating the pressure, will exacerbate it: data centers are major electricity consumers, the energy transition further increases demand for power and metals, and even if these resources can be supplied in the future, they require far more capital than is currently available. The cost of capital has already risen accordingly. During the 2022 inflation episode, real yields on advanced-economy government debt, which had been at historic lows for over four decades, surged to their highest levels since before the financial crisis. Near-zero interest rates were the anomaly, not the target to which policy will return.
In short, central banks are using the wrong tools. Their instruments can only address demand-driven inflation and the capital cost issues caused by structural factors; at best, they can trigger a recession without solving the underlying problems. Higher policy rates cannot lower oil prices, replace displaced workers, or increase the supply of savings. The expectations they are trying to defend show little sign of wavering, and the recession they risk to uphold those expectations is the greater danger. Investors, for their part, are making the opposite mistake—they still believe they are in a world that has already ended. When economic growth and inflation diverge, central bank backstops fail; during supply shocks, bonds and equities fall together, as in 2022; and real interest rates remain elevated because capital is genuinely scarce, not because policy is temporarily restrictive. The assets that will benefit are those tied to physical resources—such as energy and related raw materials. The hardest hit will be long-duration bonds and stocks whose valuations were inflated by cheap capital. The September decision itself is not what matters; what matters is the policy environment that led to it. The age of abundance is over, and neither policy nor markets have yet adapted to this reality.
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