Artificial Intelligence is transforming so many facets of how consumers live and work today. But now, one economist believes AI is actually driving interest rates higher.
Daryl Fairweather, chief economist at Redfin, explained her thoughts in a post on X on Monday that delved into economic theory.
The theory is that because AI is potentially supercharging efficiency when it comes to things like machines and computers, companies are investing heavily in the sector. Meanwhile, lenders are more attracted to those companies that are more likely to provide high returns — which right now are those investing in AI, Fairweather explained.
AI is driving interest rates higher.
As Big Tech borrows billions for AI, it crowds out homebuyers through higher rates.
Key takeaways:
The Neutral Rate (r*) has shifted up
— Daryl Fairweather, PhD | Chief Economist (@FairweatherPhD) February 16, 2026
“But because lenders see that there is this high rate of return on AI investment and they’re putting all their capital into that or a large amount of capital into that, there isn’t as much capital leftover for the rest of us,” Fairweather said.
“This is why it is more expensive to get a loan for everyday things, like a mortgage or a car or a credit card. And it’s also more expensive for businesses to get small business loans to cover their expenditures. So AI investments, these large AI technology firms, they’re kind of sucking up all the capital and there’s less capital left for the rest of us. And that capital, because it’s more scarce for the rest of us, is now more expensive to obtain through a loan.”
During the 2010s, the rate of return on capital was much lower, and there was much more money floating around the economy, Fairweather added. As a result, lenders offered cheaper loans — which led to mortgage rates of around 4 percent right before and during the COVID-19 pandemic.
The Federal Reserve is also responsible for setting the federal funds rate, which it uses in an attempt to keep the economy in equilibrium. When out of equilibrium, the Fed might lower rates so that the economy warms up, as it did after the Great Recession. Or, the Fed can raise rates to cool down a hot economy and stem inflation, as it did post-pandemic.
Right now, the Fed is aiming for a neutral interest rate, but has to estimate what that rate is based on economic data, Fairweather said. However, Fairweather and other economists are saying that the neutral interest rate is “fundamentally higher” than it was pre-pandemic because the rate of return on capital is also higher than it was before the pandemic. And that can be chalked up to AI, Fairweather said.
“I am arguing that the reason that the rate of return on capital and the neutral interest rate is higher now is because of AI,” Fairweather said. “Because AI has fundamentally changed the rate of return on capital investments. So because this neutral interest rate is higher now, that means that all interest rates are going to be higher now, and that includes mortgage rates, that includes credit cards, and it’s just going to be more expensive for everyday people to borrow in this economy than it would have been back in the 2010s.”
That higher neutral rate is beneficial to people who have capital in high-yield savings accounts because they are getting higher returns than they were 10 to 15 years ago. But for those who don’t have savings, it is much more expensive to borrow money, which is a burden on small businesses, especially.
This brings us back to another example of how the K-shaped economy is playing out, a phenomenon that economists started talking about last fall. While wealthy individuals continue to become more well-off in this economy, lower-income individuals struggle more. The same is happening with larger corporations and small businesses, Fairweather said.
“If anything, small businesses are hurting because of how much higher interest rates are and the cost of borrowing is higher for them.”
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