Kyle’s Chart of the Week
Should investors be concerned about the rising cost to pay interest on the U.S. National Debt?
On Friday, Jerome Powell, Chair of the Federal Reserve (the “Fed”), gave an update of the Fed’s view of current economic conditions during the press conference at the Jackson Hole Economic Symposium. His message was clear: they are committed to achieving price stability and controlling inflation. His remarks created a sentiment that interest rates (one of their monetary policy tools) could be ‘higher-for-longer’. We’ve previously covered how higher Federal Funds rates effect other lending, like mortgages, but one of the lesser considered implications of higher interest rates is its effects on the U.S. Government’s net interest payments (the interest that is paid out on debt securities issued by the Treasury). Simply stated, rising interest rates means rising net interest payments.
So, should there be concern? Not yet, but it shouldn’t be ignored either.
In 2021, the federal government spent $352 billion on interest payments, 5% of total federal spending. As the chart below shows, this is near the all-time high, as net interest payments have been moving up over roughly the last 10 years. As interest rates are on the rise, it would make sense that the trend of increasing net interest payments will continue. To put this in context, in 2021, the federal government spent more money on interest payments than it did on education, transportation, science, and space… combined. These payments occupy a significant amount of money that could otherwise be allocated to investments in manufacturing, technology, or education.
However, in 2021, net interest payments were 1.6% of GDP, which is below the 50-year average of 2% and well below the 3% seen during the 1980s. But, as conditions such as inflation, interest rates, publicly-held debt, and the maturity structure of outstanding securities greatly effect net interest costs, it is a metric we should continue to monitor.
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