Fed rate hikes are expected to make the US national debt more expensive

The Federal Reserve He is leading a brutal campaign to crush persistently high inflation with the sharpest interest rate hikes in decades.

While most of the recent attention on the US central bank has focused on whether policymakers will succeed in cutting rates without dragging the economy into recession, there is another major consequence of higher interest rates: the potential damage to the US government’s finances.

This is because as interest rates go up, so will they Federal government borrowing costs On $30.89 trillion in debt.

Interest payments on the national debt are already expected to be the fastest growing part of the federal budget in fiscal year 2022, according to the Congressional Budget Office. Payments are expected to triple from about $400 billion in fiscal year 2022 to $1.2 trillion in 2032—a total of $8.1 trillion over the next decade.

Inflation rose faster than expected in August, driving up prices painfully

As a proportion of the economy, the total interest on the national debt will reach a record 3.3% of GDP, the broadest measure of goods and services produced in the country, by 2032, the Central Bank of Oman estimates.

In fact, payments can be much steeper; Current interest rates are already higher than those included in the Central Bank of Oman’s estimate from May, according to the Committee on Responsible Federal Budget, a nonpartisan group advocating a reduction in the federal debt.

US Capitol Building

The US Capitol is seen on the evening of August 6, 2022, in Washington, D.C. The Senate plans to run through the night to vote on the inflation-reduction bill, expected to expire on August 7. (Photo by Anna Rose Layden/Getty Images/Getty Images)

Federal Reserve policymakers have already approved four consecutive rate hikes this year – including two massive 75 basis point increases in June and July – and signaled they are nowhere near a halt as they try to crush hyperinflation. The central bank is widely expected to approve another three-quarter percentage point increase at its meeting next week, or even vote to raise interest rates by a full historical percentage point.

The current benchmark Fed Funds range of 2.25% to 2.50% is around the “neutral” level, which means it is neither supportive nor constrained The economic activity. However, Federal Reserve Chairman Jerome Powell suggested that a restrictive stance would certainly be necessary as the central bank tries to put pressure on the economy.

US inflation expectations slipped again in August, New York Fed said

“The Fed has and accepts responsibility for price stability,” Powell said last week at the Cato Institute’s 40th Annual Monetary Conference. “We need to act now – frankly, aggressively.”

Federal Reserve Chairman Jerome Powell

Jerome Powell, Chairman of the US Federal Reserve, speaks during a press conference following the Federal Open Market Committee meeting in Washington, DC, on May 4, 2022. (Photo: Al Drago / Bloomberg via Getty Images / Getty Images)

For years, the US has been able to borrow cheaply, as interest rates have remained historically low. However, as the federal funds rate increases, so does short-term interest rates on Treasuries, making federal borrowing more expensive.

“The growth of interest costs is a major challenge in the long run as well,” the Peter Peterson Foundation said.

CBO projections show that interest payments could eventually reach nearly $66 trillion over the next 30 years, eventually capturing nearly 40% of total federal revenue by 2052. Interest costs will also become greater.” Program” over the next few decades, exceed defense spending in 2029, Medicare in 2046, and Social Security in 2049.

Billionaire David Rubinstein warns inflation will be ‘hard’ for the fund to reduce

“As interest rates rise and state debt grows, it will become more expensive to borrow in the future. Congress and presidents of both parties have, for many years, avoided making difficult choices about our budget and failed to put it in a sustainable position. It is critical that we make tough choices about our budget,” the Peter Peterson Foundation said. Lawmakers take action on the mounting debt to ensure a stable economic future.

Biden signs inflation-reduction bill

President Biden signs HR 5376, the Inflation Reduction Act of 2022 (the Climate Change and Healthcare Bill) in the White House dining room on August 16, 2022. (Photo by Demetrius Freeman/The Washington Post via Getty Images/Getty Images)

The national debt is set to reach $31 trillion as soon as this month amid a flurry of new spending President Biden and Democratic lawmakers. Biden signed into law a Health Care Expenditure and Climate Change Act — dubbed the Reducing Inflation Act — in early August that would spend an estimated $739 billion over the next decade. Most of this revenue comes from new revenue generated by higher taxes; About half will go to pay off the debt.

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However, that was offset by Biden’s decision last month to cancel $10,000 of student loan debt for millions of low-income Americans and $20,000 of debt owed to Bill Grant recipients. It is estimated that the policy could cost up to a trillion dollars.

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