US Treasury Secretary Janet Yellen warned that raising interest rates may increase financial burdens, which would necessarily lead the government to resort to increasing revenues, at a time when Democrats are moving to keep taxes on the highest-income families in the United States.
Yellen said that expectations of higher interest rates in the long term make it difficult to contain US borrowing needs, which increases the importance of increasing revenues in negotiations with Republican lawmakers (in Congress).
Raising interest means increasing the return that is added to what the United States borrows internally and externally through issuing debt instruments.
The last monetary policy meeting at the end of last month and the beginning of this month showed that some members of the US Monetary Policy Committee tend to raise interest rates to curb inflation.
“We raised interest expectations,” Bloomberg quoted Yellen as saying. “It makes a difference. It makes it a little more difficult to keep the deficit and interest expenses under control.”
Budget proposals
Yellen touched on the budget proposals presented by the Biden administration, saying that they ensure that the country remains on a sustainable financial path, and emphasized the measure of inflation-adjusted interest payments compared to the gross domestic product.
This percentage jumped last year, but the White House expects it to stabilize at about 1.3% over the next decade.
“I don’t have a fixed rule, but I don’t want to see it exceed 2%,” she said. She had previously said that management’s forecasts generated “historically normal” debt costs.
By contrast, economists at Goldman Sachs Group see the ratio exceeding the allowable ratio, predicting that real net interest payments will reach 2.3% by 2034, which was the bank’s forecast of 1.5% years ago.
The rise in interest rates is a major reason behind the deterioration in expectations, as the Federal Reserve strongly increased interest rates starting in 2022 to combat inflation, making debt service more expensive for the government.
Treasury bond yield
In its latest annual budget proposal, the White House projects that the yield on 10-year Treasury bonds will reach 3.7% in the early 2030s, nearly a full percentage point higher than the 2.8% seen in its proposal three years ago.
Interest rates on Treasury bonds, which closely track the Federal Reserve’s benchmark rate, rose about half a percentage point in that longer-term forecast.
“We have put a lot of deficit reduction measures in place in the budget to keep interest expenses at a level that we believe is fiscally responsible,” Yellen said.
Yellen said, “We will begin tax negotiations” with Republicans, referring to the looming legislative battle over the tax cuts that were approved in 2017 under former President Donald Trump and are scheduled to expire at the end of 2025.
While Trump has pledged to extend the cuts, President Joe Biden wants to keep the cuts only for those who earn less than $400,000 annually. As for revenues from tax cuts that were not extended, Yellen said in the interview, “Maybe we need to use some of them” to reduce the deficit.
