Fed Rate Increase a Reminder on Rising Debt Costs

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Citing a strengthening U.S. economy, the Federal Reserve last week announced it would begin raising short-term interest rates for the first time since the financial crisis and recession — a reminder that the federal government expects to face rapidly rising interest costs in the coming years.

Like other borrowers, the federal government has long enjoyed interest rates in recent years that are far below historical levels. But these rates will inevitably return to more normal levels at some point, raising federal interest costs. Those costs will also increases because Washington continues to borrow more money.

As the Congressional Budget Office explained in an August report: “Because interest rates are now very low by historical standards, net outlays for interest are similar to amounts recorded 15 to 20 years ago, when federal debt was much smaller. As those rates rise, and as debt continues to mount, the government’s cost of financing that debt will climb.”

The budget office projected in August that under current law, net interest costs would rise from $261 billion in 2016 to $755 billion in 2025. The tax and spending package that Congress just approved, however, will likely make interest costs climb even faster because it will require additional borrowing.

External links:
Press Release on Rate Increase (Federal Reserve)
Aug. 25 Update to Budget and Economic Outlook (CBO)
Interest Rates and the Debt (Committee for a Responsible Federal Budget)
Higher Interest Rates Will Raise Interest Costs on the Debt (Peterson Foundation)

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