Fed’s Interest Rate Hike Underlines Importance of Reducing Debt
The Federal Open Market Committee (FOMC) of the Federal Reserve just announced an interest rate hike of 50 basis points, pushing the federal funds rate to 0.75 percent in order to combat today’s high inflation. It also announced plans to begin reducing the central bank’s balance sheet, which largely consists of U.S. debt obligations. The following is a statement from Maya MacGuineas, president of the Committee for a Responsible Federal Budget:
Today’s Fed announcement is a good reminder about the high risk associated with excessive debt. While raising interest rates and shrinking the Fed’s balance sheet can help reduce inflation, it also increases payments the federal government must make on its debt.
Already, the federal government spends $330 billion per year, or $2,207 per taxpayer, on interest payments – more than on food stamps and disability insurance combined. And two-thirds of our debt is slated to roll over in the next five years, likely into higher interest rate bonds.
For every 1 percentage point increase in interest rates above projections, deficits grow by $2 trillion over a decade; that’s on top of the nearly $13 trillion in projected borrowing over the next decade.
Unfortunately, today’s high inflation – driven in part by excessive stimulus – leaves the Federal Reserve with little choice but to raise rates. To limit the damage, lawmakers should use fiscal policy to help rather than hinder the Fed’s efforts. That means paying for all new legislation, ending ongoing COVID relief like the student debt pause, and beginning to reduce our deficits and debt. There are plenty of options to reduce health care costs, close the tax gap, cut wasteful spending, and raise revenue that can help in the near term.
For years, policymakers have failed to take our debt seriously, and calls to expand the debt have grown louder. Rising interest rates are an important reminder that high debt has a cost, and that those calls for further debt were imprudent.
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