Latest Fed Rate Hike Could Add $2.1 Trillion To Federal Deficit
The Federal Reserve continued its aggressive tightening on Wednesday, Sept, 21, raising the benchmark interest rate by 75 basis points for the third straight time. The moves are designed to ease soaring inflation, but so far they seem to have had little impact, as consumer prices continue to increase at the fastest pace in 40-plus years. However, higher interest rates could contribute to a couple of things nobody wants — a recession and an increase in the federal deficit.
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According to a new analysis from the nonprofit Committee for a Responsible Federal Budget (CRFB), this week’s rate hike will add $2.1 trillion to government deficits over the next decade, Yahoo Finance reported. The CRFB doesn’t necessarily lay the blame at the feet of the Fed. Instead, it points to lavish spending and borrowing packages under the Biden and Trump administrations.
“The irresponsible fiscal policy [of recent years] has made the job of the Federal Reserve many times more difficult,” CRFB President Maya MacGuineas told Yahoo Finance in an interview.
She added that the chance of a recession is “even more likely” as the Fed tries to get its arms around various economic challenges.
In a Sept. 9 blog on the CRFB website, MacGuineas cited Congressional Budget Office (CBO) data showing that the United States borrowed more than $944 billion in the first 11 months of fiscal year 2022 — including $217 billion in August alone.
“As we approach the end of the fiscal year — and still without a budget in place for next year — this latest report is a reminder that the budget deficit remains alarmingly close to the trillion-dollar mark and will only grow if lawmakers do nothing to reverse course,” MacGuineas wrote.
That was before the Fed’s latest interest-rate hike. According to Yahoo Finance, the U.S. currently has a $1 trillion annual budget deficit, which represents the amount of money the federal government must borrow each year to pay its expenses. Interest payments on the national debt — currently estimated at nearly $31 trillion — are expected to be the fastest-growing part of the federal budget in the coming years.
Meanwhile, MacGuineas isn’t the only one raising the alarm about a looming recession. Vanguard Senior International Economist Andrew Patterson told Yahoo Finance that a Fed-induced recession could be hard to avoid in 2023, though it is “likely to be somewhat more mild in nature.”
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Shawn Snyder, Citi’s U.S. Wealth Management Head of Investment Strategy, said that if the economy sees signs of recession in the near future – such as two straight months of job losses – the Fed will be “in a more difficult place” that could force the central bank into a holding pattern. In this case, the Fed might have to dial back its tightening policy.
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