Federal Reserve Lowers Interest Rates Amid Rising Government Borrowing Costs
TL/DR –
The Federal Reserve has lowered the federal funds rate by 0.50 percentage point to a target range of 4.75 to 5.00 percent. This decision will impact the federal government’s borrowing costs and the nation’s fiscal picture. According to the Congressional Budget Office, annual net interest costs are projected to total $892 billion in 2024 and rise to $1.7 trillion in 2034, indicating a significant long-term fiscal challenge for the United States.
Federal Reserve Cuts Federal Funds Rate
On September 18, 2024, the Federal Reserve reduced the federal funds rate by 0.50 percentage points. This adjustment brings the target rate down to 4.75 to 5.00 percent. The federal funds rate serves as the benchmark for short-term securities including Treasury bills. Changes in this rate have implications on inflation, federal borrowing costs, and economic stability.
The Fed has adjusted the federal funds rate multiple times in recent years to mitigate inflation. After seven increments in 2022 and four in 2023, the rate reached a 23-year high of between 5.25 and 5.50 percent. Today’s cut signaled the Fed’s belief in moderating inflation.
U.S. Treasury securities rates impact the federal government’s borrowing costs. Rising short-term rates on Treasury securities, as a result of increased federal funds rate, escalate federal borrowing expenses. However, current expectations of lower inflation have reduced the 10-year Treasury rate from about 5 percent to approximately 3.7 percent.
According to projections by the Congressional Budget Office (CBO), net interest costs in 2024 are set to reach $892 billion, nearly doubling in the following decade. Thus, projecting total costs of $12.9 trillion from 2025 to 2034. If interest rates exceed CBO’s estimates, these costs may rise even faster.
CBO’s long-term projections suggest that by 2054, interest payments will account for 34 percent of all federal revenues. Interest costs are predicted to become the largest federal spending category, surpassing Social Security in 2051.
These growing interest costs pose significant long-term challenges, threatening to overshadow critical public investments in areas such as R&D, infrastructure, and education. By 2054, interest costs are expected to triple federal spending in these sectors.
Necessary borrowing to address the COVID-19 pandemic, along with a pre-existing imbalance between spending and revenues continue to strain the U.S. fiscal landscape. The sensitivity of the massive federal debt to interest rates necessitates lawmakers to confront these issues and create a sustainable budget trajectory for the future.
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