The Federal Reserve’s decision to cut interest rates last week made headlines. But for households and businesses, it doesn’t mean borrowing is getting cheaper anytime soon.

Mortgage rates remain stubbornly high. Small businesses are paying more for loans. Taxpayers are smarting due to Washington’s fiscal mismanagement. Interest rates now carry something extra: a “policy dysfunction surcharge.”

Reckless spending during and after the pandemic, along with an overly accommodative Fed, produced the worst inflation since the 1970s. Now, political pressure and executive meddling risk pushing the central bank toward an even looser stance, just when credibility matters most. Investors see the risks and are demanding more compensation to lend. The result: long-term interest rates well above where inflation expectations suggest they should be. That gap costs the U.S. economy about $160 billion a year. For a typical homeowner, it means paying more than $100 extra per month on a $400,000 fixed-rate mortgage.

Interest rates compensate investors for three things: the use of their money, inflation, and the chance borrowers won’t pay them back. Treasury securities reflect only the first two. Washington won’t default when it can print more dollars. The Fed sets overnight rates, pushing them up to cool growth or down to spur activity. Over the long run, markets expect short-term rates to average in the low 3 percent range.

So why is the 10-year Treasury yield in the low 4 percent area, more than a percentage point higher than expectations?

The reason is the so-called “term premium.” This is the extra yield investors demand to protect themselves from being wrong about future short-term rates. The premium cannot be directly observed, but it can be estimated. Fed models and survey-based measures show it rising steadily since COVID-19, up 0.5 to 0.8 percentage points compared with pre-pandemic levels.

The change is stark. Before the pandemic, the term premium was often negative, because investors prized Treasurys as a safe haven. Since then, inflation, surging deficits and rapid growth in the money supply have eroded confidence. Investors are no longer willing to assume Washington will keep long-term borrowing costs in check.

The consequences are expensive. Last year, the federal government borrowed $4.1 trillion in long-term fixed-rate debt. States, municipalities, companies and households borrowed another $3.7 trillion. Apply the higher-term premium across that $7.8 trillion, and the added cost comes to about $160 billion every year. That penalty repeats as long as the dysfunction premium persists.

This isn’t the natural price of money. It is a premium imposed on American borrowers because Washington can’t control its appetite for debt. Until policymakers rein in deficits and restore confidence, families buying homes, entrepreneurs expanding businesses and taxpayers across the country will keep paying the price.

Robert Goldberg is the James F. Bender Clinical Professor of Finance at Adelphi University’s Robert B. Willumstad School of Business.