The Federal Reserve announced an increase in its benchmark interest rate last Wednesday, from 1.5 percent to 1.75 percent, the highest level since the Great Recession began in 2008. The first such hike of new Fed chairman Jerome H. Powells tenure, it was expected and represented continuity with the plans and policies of his predecessor Janet H. Yellen. Under Mr. Powell, it appears, the central bank expects continued strong growth and feels it can keep unwinding the super-low interest rates and other crisis measures adopted a decade ago.
Most commentary on this prudent step, likely to be the first of at least three this year, has focused on what it might portend for jobs and the financial markets. Well and good. More needs to be said, however, about the potential impact of rising interest rates on the federal governments financial future. The recession reduced tax revenue while triggering massive increases, both automatic and discretionary, in federal spending for food stamps, jobless benefits and other programs. Larger deficits were inevitable, but the Feds low interest rates made them easier to finance.
Now, Fed policy will have the effect of raising federal debt service costs. Indeed, this was already foreseeable at the time the Republican Congress enacted, and President Trump signed, a massive new tax cut making that trillion-dollar-plus bill doubly fiscally irresponsible. A recent report from the Center for a Responsible Federal Budget, based on Congressional Budget Office interest rate assumptions, projected that total interest costs could rise from $263 billion (1.4 percent of gross domestic product) in 2017 to $1.05 trillion (3.6 percent of GDP) in 2028.
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