5% Interest Rates Are a Troubling Sign of the Road Ahead

The interest rate on the ten-year Treasury note topped 5 percent today for the first time since 2023 and – outside of 2023 – the first time since 2007. The ten-year rate has now risen roughly half a percentage point in just two months, and it has tripled since the start of 2022. At 5 percent, the ten-year yield is more than 80 basis points above projections from the most recent Congressional Budget Office baseline.  

The following is a statement from Maya MacGuineas, president of the Committee for a Responsible Federal Budget:

The era of low interest rates is long over. The trillions of dollars borrowed under the premise that money was free is now costing us dearly.

High debt is driving up interest rates, and high interest rates are driving up the debt. Last year, the federal government spent nearly $1 trillion on interest. That’s about 3 times what we spent in 2020 and 2021 and more than we spend on defense. With interest rates high and rising, interest costs are slated to explode from here.

If rates remain 80 basis points-plus above projections over the next decade, we’re on course to spend an annual $2.7 trillion on interest payments at the end of the decade. We’ll be spending more on interest than Medicare or Social Security retirement benefits.

High interest rates also increase cost-of-living for ordinary Americans. New homebuyers are paying 7 percent on their mortgages, and other loans are even more expensive. For businesses, the high cost of borrowing may stifle investment, slowing economic growth and leaving Americans poorer than they otherwise would be.

The real threat is the debt spiral. If interest begets debt, and debt begets interest, eventually debt will spin out of control. A fiscal crisis, once unthinkable, is now a distinct possibility.

It’s long past time for policymakers to wake up to the growing warning signs and pivot toward meaningful deficit reduction. Putting deficits on a path toward 3% of GDP would put our debt on a more sustainable course and likely reassure financial markets that we’re serious about bringing our fiscal house in order.  

If 5% interest rates aren’t a wake-up call, I don’t know what will be. 

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For more information, please contact Matt Klucher, Assistant Director for Media Relations, at klucher@crfb.org.