A recent report presented at the Federal Reserve's Jackson Hole summit outlines the possibility that US government debt could rise to 250% of GDP without increasing interest rates, provided the demand for Treasury bonds remains stable.
Debt Projections
A group of economists including Adrien Auclert (Stanford), Hannes Malmberg (University of Minnesota), Matthew Rognlie (Northwestern University), and Ludwig Straub (Harvard) presented a projection that the United States could accumulate government debt equal to 250% of its economy. This scenario is predicated on the demand for government bonds remaining high. Straub explained, "Until fiscal consolidation occurs, there will be a race between the rising asset demand of an older population and the rising debt issuance needed to finance the associated increase in government expenditures."
Concerns About Debt Sustainability
While current demand for debt remains strong, Straub warned that "without large adjustments, the supply of debt will eventually outrun demand, forcing interest rates to rise." The current debt stands at 97% of GDP, and it is expected to reach 117% by 2034. Following the passage of recent legislation, this projection was increased by an additional 9.5 percentage points.
Implications for Fed Policy
The Federal Reserve faces surging interest payments. Over the last year, the US Treasury has paid $1.2 trillion in interest. If the Fed does not change rates, this figure is expected to rise to $1.4 trillion by 2026. Fed Chair Jerome Powell signaled that a shift in policy toward job creation is necessary. However, despite challenges with inflation, which has prompted the Fed to focus on controlling inflation, there is now a significant threat of rising unemployment, necessitating a review of the current rate.
Amid rising government debt and increasing interest payments, the Fed faces the challenge of balancing inflation and employment. Current economic actions may significantly impact the country's economic status.
