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Saturday, December 17, 2016

The Cost of Rising Interest Rates

The Cost of Rising Interest Rates

Over the next decade, interest payments on the debt are projected to be the fastest growing part of the federal budget.
Last year, the federal government spent $241 billion – roughly 1.3 percent of Gross Domestic Product (GDP) – on interest payments. That’s among the lowest at any point since the 1970s, driven by historically low interest rates.
Yet recent market activity and expected Federal Reserve actions already suggest interest rates will rise; in fact, both the 3-month Treasury bill and 10-year Treasury note have increased by over 75 percent in the past 5 months.
In combination with rising debt levels, this increase in rates will lead interest payments to grow rapidly. Under current law, the Congressional Budget Office (CBO) projects interest payments to nearly triple in nominal dollars and double as a percent of GDP – from $241 billion and 1.3 percent of GDP in Fiscal Year (FY) 2016 to $712 billion and 2.6 percent of GDP by FY 2026.

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