This post was co-authored with Louise Mackey, intern from the Washington Ireland Program
Interest rates are at historically low levels, making borrowing very affordable for consumers -- and the United States government. When it issues debt, the federal government, like any other borrower, pays interest. This is how the government finances its annual budget deficits.
Why are interest rates so low now?
There are two primary reasons. First, during the recession there was less demand for credit. And to combat this, the Federal Reserve brought interest rates down to spur borrowing. Second, in response to the global economic slowdown, investors around the world have been desperate to place their money in a safe haven -- and U.S. Treasuries are still considered the safest investment in the world.
Interest rates are projected to stay at or near historic lows over the next two years as the economy continues to recover. Eventually, though, interest rates will begin to return to normal levels as economic growth puts inflationary pressure on the economy. This normalization of rates will increase the government’s borrowing costs. Those costs will also be going up simply because the government is borrowing...