Fed is rising the interest rate since 2022 but it increased the cost of Federal’s borrowings too, limiting its ability to boost the economy with fiscal stimulus when it goes down to a recession.
Let’s do a simple math, currently the Federal’s annual interest expense is about $666B, it comprises of payment to T-bill($3.7T), T-note($2.4T) and other mid or long-term debt totally worth $18T as of 2021 end. Now Fed has said they want the base rate to be raised to 3.5% by year end, so basically it would be an additional 3% burden annually.
As to T-bill this adds $111B interest to be paid annually (3.73%), and additional $86B (2.43.5%) for T-note, needless to say those longer debt. Therefore the total interest expense would reach AT LEAST $863B.
There is no other way than borrowing more to pay those stuff, given they have much less space to raise taxes or lower spendings. If they keep on rising rates the interest will soon exceed the principal cut, finally we will just circle back to where we were.
So what we can expected is the Fed will stop rising at some point, in my opinion may less than 3% given the incoming recession, and try to balance off the debt gradually going forward. The market will reach bottom when this info priced in.
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