U.S. National Debt Tops $30 Trillion as Borrowing Surged

But that backdrop could start to change as the Federal Reserve prepares to raise interest rates, which have been set near zero since the start of the pandemic, to curb inflation.

The Fed indicated last week that it was on track to begin increasing rates at its next meeting in March. Investors are predicting the central bank could usher in five rate increases this year, bringing rates to a range of 1 to 1.25 percent.

The Fed has also been keeping long-term interest rates low by buying government-backed debt and holding those securities on its balance sheet. Those purchases are set to wrap up next month, and last week, the Fed signaled it planned to “significantly” shrink its bond holdings.

Esther L. George, the president of the Federal Reserve Bank of Kansas City, suggested during a speech this week that the Fed’s big bond holdings might be lowering longer-term interest rates by as much as 1.5 percentage points — nearly cutting the interest rate on 10-year government debt in half. While shrinking the balance sheet risks roiling markets, she warned that if the Fed remained a big presence in the Treasury market, it could distort financial conditions and imperil the central bank’s prized independence from elected government.

As rates rise, so does the amount that the United States owes to investors who buy its debt. The Congressional Budget Office estimates that if interest rates rise in line with their own forecasts, net interest costs will reach 8.6 percent of gross domestic product in 2051. That would amount to about $60 trillion in total interest payments over three decades.

“A larger amount of debt makes the United States’ fiscal position more vulnerable to an increase in interest rates,” the C.B.O. said in its long-term budget outlook.

In a recent report, Brian Riedl, a senior fellow at the Manhattan Institute, a conservative think tank, pointed to the C.B.O.’s prediction that the average interest rate on 10-year Treasury notes would rise from 1.6 percent to 4.9 percent over the next 30 years. He estimates that if interest rates exceed that forecast by just a percentage point, it will mean another $30 trillion in interest costs during that time.

Article source: https://www.nytimes.com/2022/02/01/us/politics/national-debt-30-trillion.html