That Fed Interest Rates Rise Mean for the National Debt

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Much has been made of the negative impact of the Federal Reserve’s interest rate hikes on stocks, bonds and mortgages.

But we haven’t heard much about the detrimental impact the Fed’s higher rates, designed to help curb inflation, are having on federal government finances.

Think of it as 12 figures of collateral damage. That’s right, a 12 digit value.

Why don’t people discuss it? Because there isn’t a single place that has a number showing how much Fed rate increases will add to the federal government’s interest tab.

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But with the help of the Treasury and Social Security actuaries, I came up with a reasonable estimate of this additional interest cost. By my calculations, the higher Fed rates will increase federal government interest costs by about $128 billion a year.

That may not seem like much, considering the trillions of dollars of investment wealth that have been vaporized by the Fed’s higher rates. Or given the $1.4 trillion shortfall in President Biden’s proposed budget plans for this year.

But $128 billion is close to the $133 billion total that the Biden budget is seeking for the departments of energy, homeland security and agriculture.

Or is just 2 billion dollars below the total that the Biden budget proposes to spend on the Department of the Interior, the Department of Labor, the Department of Commerce, the Treasury, the Environmental Protection Agency, the National Aeronautics and Space Administration, the National Science Foundation, the Social Security Administration and the Corps of Engineers. Combined.

Let me show you where my numbers come from with the extra Fed costs.

As of March 31, some $23.88 trillion of national debt was so-called “public debt” held by investors, and another $6.52 trillion was “intra-government” debt held primarily by funds. federal trustees.

According to information the Treasury provided to the Advisory Committee on Treasury Borrowing – a group made up of representatives from a dozen financial institutions, including Goldman Sachs, JP Morgan and Vanguard – 29% of public debt will have to be renewed between March 31 and March 31, 2023. That equates to $6.93 trillion that will need to be refinanced by issuing new debt, what financial types call a debt rollover.

Following the Fed’s latest rate hike, interest rates on the dozen different maturities of securities the Treasury sells to raise funds have risen an average of 1.9 percentage points from their end of the year. But to be on the safe side, I rounded this figure to 1.75%.

With $6.93 trillion in public debt to be refinanced, this equates to about $121 billion a year in additional interest. The aforementioned 12 digits are valid.

There is no figure available for the intra-governmental debt which must be rolled over from March 31 to March 31, 2023. Indeed, more than 200 different governmental entities hold these securities and each keeps its own accounts.

So I came up with an estimate by extrapolating from some numbers that the Social Security actuaries gave me.

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The Social Security Old Age and Disability Trust Funds hold a total of $2.83 trillion in Treasury securities. This represents about 43% of the total intra-governmental debt.

The actuaries have told me that about $175 billion of that will have to be carried forward from March 31 to March 31 next year.

If you extrapolate that $175 billion to the remaining 57% of intra-government debt, you end up with another $230 billion that needs to be refinanced. That’s a total of about $400 billion.

Apply our 1.75% cost increase and you end up with about $7 billion in additional annual interest charges. This brings our total estimated cost of Fed-related interest to about $128 billion per year. Which, remember, is a conservative number.

All of this will add to the national debt, which will ultimately be borne by us, our children, our grandchildren and future generations.

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