U.S. interest rates—measured using the federal funds rate—effectively 0% since the beginning of the pandemic. In fact, the last time the federal funds rate exceeded 3% was in 2008.With year-on-year inflation in January 2022 up to 7.5%, interest rates are likely to rise. Anyone will tell you that as interest rates rise, so do borrowing costs. It is surprising, however, that a small increase in interest rates can have such a large impact on the U.S. federal government’s deficit.
Responsible Federal Budget Committee (CRFB) Using Congressional Budget Office July 2021 Budget and Economic Outlook Forecast (2021-2031) and estimate How these numbers will change as interest rates rise.
Numbers are not pretty. A 1 percentage point increase in interest rates would increase interest costs by $1.9 trillion (or about 26%). In addition, the national debt will rise from 107.5% of GDP to 113.7% of GDP. While some borrowing is certainly necessary in the short term to offset the economic impact of the COVID-19 pandemic, years of deficits mean the U.S. government will continue to incur huge debt servicing costs that will only rise as interest rates rise .
