As the economy continues to struggle, American consumers continue to enjoy historically low interest rates. So, too, does the United States government. But federal officials must keep in mind that these low rates won’t last forever – and even small rate increases could substantially worsen federal budget problems.
The Federal Reserve has used low interest rates to encourage borrowing and boost economic activity. In addition, turmoil in the financial markets and uncertainty about Europe have kept demand high for U.S. Treasuries, which are considered the world’s safest investment.
But interest rates will eventually return to normal levels, as noted in a blog post Monday by Jeff Thiebert, The Concord Coalition’s national grassroots director, and Louise Mackey, an intern from the Washington Ireland Program. Rising rates will increase the government’s borrowing costs even as Washington borrows more and more money.
“Since Washington has failed to lock in today’s low rates for a longer period,” they add, “interest rates increases could have a dramatic impact on the federal budget in the future.”
Interest rates can be volatile and would certainly increase if investors became more skeptical about whether the nation’s leaders were able to deal with the fiscal challenges ahead. That is one more reason why Washington must pursue comprehensive fiscal reforms.