Anyone smart at economics able to share what type of pressure the US is facing on servicing the growing debt (making interest payments) with rates increasing? Does the fed fund rate directly affect how much interest has to be paid on national debt?
https://fred.stlouisfed.org/graph/?g=UtqF
Interest payments relative to federal tax receipts are at multi-decade lows.
Some other important points to remember:
- $5.7 trillion of the debt is held by the Federal Reserve. The interest that they earn on this is passed back to the US Treasury. It effectively "doesn't count" except for whatever minor operating costs the Fed takes out.
- Inflation has risen faster than rates have risen. This means federal tax receipts will likely rise faster than interest payments as well.
It'll take some time before the current debt needs to be replaced at the higher rate. We've had artificially low rates for the past 14 years. I argue that spending 20% of tax revenue on interest alone is grossly irresponsible. We still need to pay out the face value of those treasuries too.
> $5.7 trillion of the debt is held by the Federal Reserve. The interest that they earn on this is passed back to the US Treasury. It effectively "doesn't count" except for whatever minor operating costs the Fed takes out.
It "doesn't count" if you ignore the accelerating wealth disparity in our society.
The parent asked about how interest rates affect the burden of servicing the debt. That is the sense in which it literally "doesn't count" -- interest paid by the Treasury to the Fed is returned by the Fed to the Treasury as distributed earnings.
The fed is not rolling over its government debt portfolio into new debt at higher rates. Rather it is undergoing quantitative tightening selling off/allowing bonds to mature.
Can you explain your reasoning here? It seems wrong to me.
The Fed has stated in speeches that they are planning on keeping trillions of securities as assets on their balance sheet. These will continue to earn billions in interest per year. Further, they do not directly "pay out interest" -- they pay out their net income to the Treasury. Rising rates on US debt does not increase what the Fed has to pay out to the Treasury except indirectly if they purchase more higher-earning assets.
https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
While they do own assets on their balance sheet, these assets have a fixed interest rate. The interest rates stays the same as it was when they bought it. When the fed was buying these treasuries during QE, rates were very low. Less than a percent, less than even half a percent for a while. The interest rate on these interest earning assets, while it is nominally billions of dollars, will stay flat. Meanwhile, the interest it pays out to banks will increase and increase and increase.
If no profit will be available, no remittances will be paid to the treasury.
And, wow, I did not know the IORB rate had gotten so high.
https://fred.stlouisfed.org/series/BOGMBBM
I think you are correct. With $3+ trillion in reserve balances, which aren't really expected to go down too much, the reserve interest payments are going to eat up a ton of the Fed's income.
[1]: https://www.brookings.edu/blog/up-front/2022/07/27/projectin...
To make up this difference, the treasury department has to sell bonds. As the FFR increases, so do the yields on treasuries. Our annual interest payments on federal debt is ~400B. That's over HALF our military budget for some perspective.
If inflation proves to be sticky, what happens if bond yields get pushed up to 10% ? Well, now congress has to borrow at 10% interest. That next 1T+ deficient would cost our country an extra 100B+ per year in coupon payments...AND we still owe the principle on those bonds when they expire. In the volcker era, we had to push interest rates up to almost 20%.
Our government has been incredibly irresponsible with managing our debt. Problem is fixing it seems impossible. We'd need to increase taxes AND cut social services. Can you imagine how painful that would be? Any politician who tried to tackle this issue would become the most hated person in America.
A 30y treasury doesn't need to be refinanced/paid back for 30 years, 10y for 10 years etc.
A smart Treasury would have locked in a lot of the debt in longer dated treasuries back when they were yielding 1% or less. This would have made the debt payments largely fixed, regardless of Fed hikes. Unfortunately from what I've heard, they are mostly financing through the fed funds/overnight rate.
So yes, US debt service costs are more variable than they could have been. But maybe somebody can chime in with hard numbers
They are absolutely thrilled for me to have a balance on my credit card of as much as I please (up to the debt limit), as long as I make my minimum payment each month.
So, it won’t happen immediately; interest payments will gradually rise over the next several years.
Gold, silver, Euro, Yen, Bitcoin... they got nothing.