The US national debt has approached the historical mark of $31 trillion
Federal Reserve is waging a relentless campaign to tamp down persistently high inflation with the most aggressive interest rate hikes in decades.
While the focus of recent attention on the US central bank has been whether policymakers can manage to lower prices without dragging the economy into recession, there is another major consequence of higher interest rates: the potential damage to US government finances.
This is due to the fact that as interest rates rise, federal government borrowing costs on its $30.89 trillion debt.
According to the Congressional Budget Office, interest payments on the national debt are already projected as the fastest growing part of the federal budget in fiscal year 2022. Payments are expected to triple from nearly $400 billion in fiscal 2022 to a staggering $1.2 trillion in 2032 – for a total of $8.1 trillion over the next decade.
As a share of the economy, total interest on government debt will reach a record 3.3% of GDP, the broadest measure of goods and services produced in the country, by 2032, according to CBO estimates.
In fact, payments can be even steeper; Current interest rates are already higher than those included in the May CBO estimate, according to the Committee on a Responsible Federal Budget, a non-partisan group that advocates reducing the federal debt.
Fed policymakers have already approved four successive rate hikes this year, including two mega-scale 75 basis point hikes in June and July, and have signaled they are nowhere near stopping in an attempt to quell runaway inflation. The central bank is expected to approve another three-quarters percentage point hike at its meeting next week, or even vote to raise rates by a historic full percentage point.
The current federal funds benchmark range of 2.25% to 2.50% is roughly at a “neutral” level, meaning it does not support or limit economic activity. However, Fed Chairman Jerome Powell suggested that a restrictive stance would almost certainly be necessary as the central bank tries to slow down the economy.
“The Fed has and assumes responsibility for price stability,” Powell said last week at the Cato Institute’s 40th annual monetary conference. “We need to act now – directly, decisively.”
For years, the US has been able to borrow cheaply as interest rates have remained historically low. However, as the federal funds rate rises, so do short-term Treasury rates, making federal borrowing more expensive.
“Rising interest costs also pose a major challenge in the long term,” the Peter Peterson Foundation said.
CBO projections show that interest payments could eventually total about $66 trillion over the next 30 years, eventually accounting for nearly 40% of all federal revenue by 2052. Interest spending will also be the biggest “program” for the next few decades. surpassing defense spending in 2029, Medicare in 2046 and Social Security in 2049.
“As interest rates rise and government debt rises, it will become even more expensive to borrow in the future. Congresses and presidents of both parties for many years avoided making difficult choices about our budget and could not bring it to a sustainable state. It is vital that lawmakers take action on rising debt to ensure a stable economic future,” said the Peter Peterson Foundation.
Public debt should hit $31 trillion as early as this month amid a slew of new spending by President Biden and Democratic lawmakers. Biden signed into law health care spending and climate action, dubbed the Inflation Reduction Act, in early August, which will cost about $739 billion over the next decade. Much of this revenue comes from new revenue from higher taxes; about half is planned to go to debt repayment.
However, that was offset by Biden’s decision last month to write off $10,000 of student loan debt for millions of low-income Americans and $20,000 of debt for Pell Grant recipients. It is estimated that this policy could cost up to $1 trillion.
Credit: www.foxbusiness.com /