Status: 05.10.2022 10:55 a.m
The US national debt has hit a record $31 trillion, nearing the debt ceiling. Can the US even afford higher interest rates?
According to data from the US Treasury Department, the national debt at the start of the new fiscal year was $31.1 trillion, the highest level in the history of the United States.
US interest rate soon at 4.5 percent
In view of the high level of national debt, the US Federal Reserve’s tough fight against inflation is increasingly becoming a problem for the national budget. Because the Federal Reserve (Fed) is on a tight rate hike course. After several XXL interest rate increases, the key interest rate in the USA is currently in a range of 3.0 to 3.25 percent.
According to the CME Group’s Fed Watch Tool, 64 percent of market participants currently expect another mega rate hike of 0.75 percentage points for the next meeting in early November. Another 0.5 percentage point step is likely to follow in December. The markets are therefore expecting a US key interest rate of 4.5 percent from December 2022 to September 2023, as market expert Robert Rethfeld from Wellenreiter-Invest emphasizes.
Borrowing money is becoming more expensive for the US
However, the rising interest rate not only entails higher borrowing costs for private households and companies; it also makes interest rates on US government bonds more expensive. The US state has to pay this interest to bond investors so that they can lend it money.
The yield on ten-year US government bonds is currently around 3.7 percent. For comparison: two years ago it was 0.7 percent. The United States finances its government spending by issuing government bonds. However, some market observers fear that if the costs for this increase so rapidly, the debt problem in the United States is likely to worsen further.
US government bonds still in demand as a safe haven
But Commerzbank economist Bernd Weidensteiner reassured: “If anyone can afford higher interest rates, it’s the USA. We don’t see any major problems for the US state budget in this regard.” The USA should have no problems getting rid of their debts on the capital market and financing themselves. “US government bonds are still the safe haven of choice for investors, especially in uncertain times like these, there is virtually no alternative,” Weidensteiner explained tagesschau.de.
In addition, the higher interest rates only become noticeable with a certain delay. “US bonds have an average term of a good six years. The higher interest rates will therefore not have a direct impact on the budget, but only gradually,” emphasizes Weidensteiner. “But if the pain is felt in the budget, then that will also increase the pressure for savings elsewhere.”
National debt nears debt ceiling
The rising borrowing costs for government debt are only one of the financial problems that the US state is currently facing. The other elephant in the room is the federal debt ceiling. This is a limit up to which the US state is allowed to borrow money. It is currently $31.4 trillion, close to the current national debt of $31.1 trillion.
The debt ceiling is set by Congress at irregular intervals. Since it was introduced in 1917, it has been increased dozens of times, otherwise the US would have run out of money.
It has always been possible to avoid payment defaults so far
Only at the end of last year did the USA raise its debt ceiling again. The situation was dire because – once again – the US was on the brink of default. In that case, US Treasury Secretary Janet Yellen warned at the time that the US economy and financial markets around the world were at risk of “irreparable damage.” It would be “irresponsible” to jeopardize US creditworthiness.
Was it her words that had an effect? In any case, the US finally raised the debt ceiling. This, too, follows a certain tradition: Despite major differences beforehand, Republicans and Democrats have always agreed to raise the limit – albeit often only after much trembling and several rounds of negotiations. “We have experienced this circus more often in recent years,” says Commerzbank economist Weidensteiner.
Things will get exciting after the midterm elections
It looks as if the political play “raise the debt ceiling” in the US will soon see a re-enactment and will once again have the financial markets in suspense. After all, national debt is rapidly approaching this magical limit.
However, since Congress recently agreed on spending authorization until mid-December, there is still a certain amount of preparation time: “The discussion about raising the debt ceiling is not likely to become really virulent again until after the midterm elections in November,” expects Weidensteiner. “But we assume that Republicans and Democrats will ultimately come to an agreement again, so that the financial markets should also be spared major turbulence.”