The zero interest rate policy (ZERP) era has officially ended. Welcome to what some are calling the HIRP — the high interest rate phenomenon. After years of ultra-low rates, the 10-year Treasury yield has climbed above 5% for the first time since 2007, and the reasons behind this shift are more complex than most headlines suggest.
📊 War, Energy, and the Interest Rate Spike
The primary driver of rising rates is clear: conflict in the Middle East. The escalation of hostilities has created significant energy supply disruptions, particularly around the Strait of Hormuz, a critical chokepoint for global oil transport. This has triggered a classic oil shock dynamic — energy prices surge, inflation follows, and bond yields climb as investors demand higher returns to offset inflation risk.
"Energy is a key input into everything. Pain at the pump turns into 'I need a raise,' which turns into 'I need to raise prices on food' — inflation bleeds into everything."
But does war always push rates higher? History offers a more nuanced picture.
⚔️ Historical Precedents: Gulf War I and Afghanistan
Gulf War I provides a textbook example of an oil shock. When Iraq invaded Kuwait on August 2, 1990, Treasury yields were already at 8.29%. Within a month of the U.S. military buildup, rates spiked to 9.05%. However, the conflict resolved relatively quickly, and six months later, yields had fallen back to 8.03% — lower than where they started.
The Afghanistan War played out in reverse. Immediately before the invasion, the 10-year yield stood at 4.52%. Initially, yields fell to 4.22% — perhaps reflecting optimism about a quick resolution. But as the conflict dragged on, rates climbed to 5.25% within six months, up roughly three-quarters of a percent.
The takeaway? Short, decisive conflicts may cause temporary rate spikes that reverse quickly. Prolonged wars with persistent energy disruptions create sustained upward pressure on rates.
🏠 Who Gets Hurt by High Rates?
The current rate environment is punishing for nearly every stakeholder:
- The U.S. Government: Refinancing debt becomes more expensive, diverting funds away from healthcare, pensions, and even military spending.
- Homebuyers: Mortgage rates have climbed above 7%, pricing many buyers out of the market. The era of 3% mortgages is fading as more homeowners move to floating-rate products or exit interest-locked periods.
- AI Companies: Despite massive revenues, AI firms still require external financing for data center buildouts and infrastructure expansion — and higher rates make that capital more expensive.
🤖 AI's Dual Impact on Interest Rates
The AI boom is creating a paradoxical effect on rates. On one hand, AI investment is demand-intensive before productivity gains materialize. Data centers require financing, construction, equipment, and electricity — all of which create upward pressure on rates today, while broader productivity benefits take years to diffuse.
As one group of economists noted, AI acts as a "source of upward pressure on real rates and potentially prices during the compute buildout." The securitization of GPUs and the backstopping of data center projects by firms like Nvidia have opened AI infrastructure investment to mutual funds and insurance funds, creating additional demand for capital.
There's also an indirect wealth effect. The AI-driven stock market rally has boosted consumer spending as investors feel richer and upgrade cars, appliances, and travel plans. This supports demand, drives inflation, and keeps rates elevated.
🔮 Apollo's Fork in the Road: Two Scenarios for Rates
Apollo outlined two divergent paths for long-term rates, both of which — interestingly — lead to lower rates:
- Scenario 1: AI Succeeds — Productivity gains diffuse across the economy, generating trillions in revenue and a deflationary impulse. As AI-driven competition lowers costs across industries (law firms, healthcare, logistics), consumer prices fall. Example: Morgan & Morgan is reportedly planning to spend $1 billion over the next decade on its own data center, but if competitors do the same, the resulting price competition could compress margins industry-wide.
- Scenario 2: AI Fails — The bubble bursts, triggering an equity selloff and a flight to safety. Investors pile into Treasuries, driving yields down.
There's also a third, wilder scenario outlined by Dylan Patel from SemiAnalysis: AI investment never stops, continuing to absorb capital indefinitely — potentially leading to a sovereign debt crisis.
🏥 Signs of AI Diffusion (and Its Limits)
AI is beginning to show up in everyday workflows. Doctors are using text-to-speech for note-taking, and patients receive text updates about their place in the queue. But legacy systems remain a bottleneck — e-signature forms that don't render properly on mobile devices are just one example of where AI agents could help but haven't yet been deployed.
"All of that means more time for doctors to actually spend with patients doing the important work — and we're not long for a future where AI agents handle all of this over iMessage."
🔥 The Fed's Dilemma: Inflation Still Too Hot
Fed Chair Powell faces mounting pressure. Consumer price inflation hit 3.4% in August, while the Fed's preferred measure — the PCE price index — came in at 3.7%. Even excluding food and energy, core inflation stands at 3.3%, well above the Fed's 2% target.
This makes it extremely difficult to justify holding rates steady, let alone cutting them. Markets are now expecting a rate hike in the near term.
🛡️ AI Safety, Coordination, and the Collective Action Problem
The debate over AI safety has intensified. Jacob Cowen resigned from Anthropic with a warning that AI will soon be able to "hack any system and mobilize real power and resources for malign purposes." Anthropic released a 154-page report on the misuse of Claude, including chapters on biological weapons research and cyber threats.
Anthropic CEO Dario Amodei published an essay calling for the industry to "slow the pace at which we improve AI capabilities" to allow risk mitigation strategies to catch up. His three-step plan includes:
- Giving independent evaluators employee-like access to frontier AI systems.
- Promoting cooperation among democracies to preserve their technological edge over China.
- Negotiating AI risk limits with China, analogous to Cold War-era nuclear arms control treaties.
This has sparked a collective action problem. AI developers want to coordinate on safety, but fear running afoul of antitrust laws. The Wall Street Journal noted that voluntary coordination may require government assurances that such cooperation won't trigger regulatory backlash.
Meanwhile, President Trump and House Speaker Mike Johnson have resisted AI regulation, framing safety concerns as a "sick conspiracy."
💰 The Tarbell Center and the AI Safety Media Campaign
A new controversy has emerged around the Tarbell Center, an organization funded by Dustin Moskovitz that provides grants to journalists covering AI safety. Outlets that have received funding include Time, MIT Technology Review, Bloomberg, The Guardian, CNBC, and many others.
Critics argue these grants create conflicts of interest, particularly when outlets fail to disclose the affiliation. Supporters counter that the grants come with no editorial strings attached and are simply supporting important journalism.
📈 OpenAI Winning Enterprise Spend at the Frontier
According to RAMP AI's latest index, OpenAI is capturing 13% of enterprise AI spend, compared to 8% for Anthropic. OpenAI's growth is driven by shifts away from smaller models and net new usage — suggesting the company retains pricing power by maintaining a competitive frontier model.
Anthropic's recent call to "pace frontier development" may have come at a cost: its model has already fallen behind on adoption. The company's data retention policies (which they plan to address by fall) remain a sticking point for enterprise customers.
🎬 John Turnus at the Emmys: The iPhone Duo Moment
Apple's John Turnus made waves at the Emmys by proudly showing off the iPhone Duo, the company's first foldable phone. Unlike Tim Cook's awkward product plugs in previous years, Turnus's appearance was described as "happy and proud" — a reflection of genuine excitement about a novel hardware innovation.
"He seems so happy and proud showing off the iPhone Duo. It's kind of nice and sweet to see — this has been his life's work for decades."
🔚 Final Thoughts
The high interest rate era is here, driven by war, energy disruptions, and the capital-intensive AI buildout. While history suggests rates could fall once conflicts resolve, the path forward depends on how quickly productivity gains from AI materialize — and whether the industry can coordinate on safety without sacrificing its edge over China.
In the near term, expect continued volatility, political battles over AI regulation, and a Fed caught between inflation control and economic growth.
