Recent inflation and economic data have increased expectations that the Federal Reserve may be nearing the end of its current rate-hiking cycle. But investors may be surprised to find that longer-term interest rates have remained stubbornly high.

The reason is simple: the Federal Reserve does not control every interest rate.

While the Fed directly influences short-term rates, longer-term borrowing costs—such as Treasury yields and mortgage rates—are determined by a broader set of forces. Inflation expectations, economic growth, government borrowing and the overall demand for capital all play an important role.

Today, several of those forces are putting upward pressure on long-term rates. The federal government continues to issue significant amounts of debt, while corporations are also raising capital at a rapid pace. The enormous investment required to build AI data centers, power infrastructure and other technology projects has added another significant source of demand for capital.

This creates an interesting dynamic: the Fed could eventually stop raising rates—or even lower short-term rates—without long-term borrowing costs falling nearly as much.

For investors, that distinction matters. Higher long-term rates can affect everything from stock valuations and bond returns to real estate, private equity and mortgage costs. At the same time, they can also create new opportunities for investors willing to look beyond the traditional stock-and-bond portfolio.

In this environment, selectivity and diversification become increasingly important. Within public markets, that means focusing on well-selected companies with strong balance sheets, durable cash flows and the ability to grow earnings even when capital is more expensive. At the same time, thoughtfully constructed private-market exposure can provide access to different sources of return—including private equity, private credit and infrastructure—that may not be fully represented in public markets.

This is particularly relevant as many of today’s largest investment themes are increasingly being financed and developed in private markets. The buildout of AI infrastructure, data centers, power generation and other critical assets will require enormous amounts of long-term capital. For appropriate investors, exposure to these areas can complement traditional equities while providing additional sources of growth, income and diversification.

Of course, private markets introduce their own considerations, including liquidity, manager selection and investment structure. The objective isn’t simply to own more investments, but to combine public and private assets intentionally so that each plays a specific role within the broader portfolio.

Rather than assuming interest rates will eventually return to the ultra-low levels of the 2010s, investors may be better served by preparing for a world in which the cost of capital remains structurally higher.

As always, the goal isn’t to perfectly predict the next move in interest rates. It’s to build a diversified portfolio capable of succeeding across a range of economic environments.