The Federal Reserve is expected to raise interest rates as soon as nine months from now, and one ramification that hasn't received much attention is that the government will have to pay higher interest rates on new debt, lifting the overall debt burden.
The federal government's debt now totals $17.8 trillion.
"The Fed's ultra-low interest-rate policy has helped limit the pain for the ongoing budget deficit and growing national debt by limiting the damage from interest expenses," Anthony Mirhaydari, founder of Mirhaydari Capital Management, writes in
The Fiscal Times.
Editor's Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See if You qualify)
"But with monetary policy on track to normalize, . . . the costs of carrying so much debt are about rise."
The Fed has kept its federal funds rate target at a record low of zero to 0.25 percent since December 2008. Fed policymakers have a median forecast of 1.375 percent for the rate at the end of next year.
Fed policymakers have higher fed funds rate predictions for the next three years than the Congressional Budget Office does.
And if the Fed officials are correct, "the national debt will be nearly $700 billion higher than it would have otherwise been" over the next five years, Mirhaydari says.
If Congress doesn't act, "the problem will only get worse as the debt and interest expense grows, threatening the dollar's status as the world's reserve currency and the Treasury's ability to respond to wars, disasters and any economic turbulence we may face in the decades to come."
While some experts viewed the Fed's policy statement last week as dovish, the central bank will clearly increase rates next year, says Harvard economist Martin Feldstein.
"They are communicating to the market that 2015 is going to see a significant increase in short rates. I suspect longer rates as well," he tells
CNBC
"So while they haven't put a date on when they are going to start, it seems to me a little less important than the fact they are telling us by the end of [2015] the fed funds rate will probably be in the 1.25 to 1.50 percent range."
Editor's Note: Seniors Scoop Up Unclaimed $20,500 Checks? (See if You qualify)
© 2024 Newsmax Finance. All rights reserved.