US Pays $2M Interest Per Minute On National Debt: 'Funny, Peculiar Chicken-And-The-Egg Type Situation'

BY Benzinga | ECONOMIC | 05/07/24 05:04 AM EDT

The United States government is currently paying an unprecedented $2 million per minute in interest on its national debt, a figure that is expected to continue rising. This development has sparked a debate on Wall Street about the impact of higher interest rates on the economy.

What Happened: The U.S. Treasury shelled out a staggering $89 billion in interest expenses in March, equating to about $2 million per minute, reported Bloomberg. This trend is anticipated to persist as the government shows no signs of reining in its spending, and the Federal Reserve is not expected to reduce interest rates in the near future.

The government’s interest payments are projected to exceed $1 trillion this year, nearly double the amount paid before the Fed began aggressively raising interest rates, according to data from the St. Louis Fed.

This surge in interest payments has coincided with a shift in the investment landscape, with the 10-year U.S. Treasury yield currently at around 4.50%, providing a stable return without the risk of capital loss.

This situation has led to some paradoxical thinking on Wall Street, with some arguing that higher interest rates have actually contributed to a more resilient consumer, thereby fueling inflation rather than curbing it.

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JPMorgan‘s Jack Manley recently suggested that to effectively lower inflation, the Fed should consider reducing interest rates, not raising them. This has sparked a debate about the potential consequences of the current interest rate environment, according to Business Insider.

“I think we’re in this funny, peculiar chicken-and-the-egg type situation where you’re not going to see meaningful downward pressure on inflation until you see meaningful downward pressure on shelter costs. And you’re not going to see meaningful downward pressure on shelter costs, until the Fed lowers interest rates,” Manley said.

Why It Matters: The U.S. national debt has been a topic of concern for several experts. Wharton professor Joao Gomes has warned that if Congress does not take immediate action, the U.S. could face a debt crisis by 2025.

The U.S. national debt has been escalating at a staggering pace, increasing by nearly $8.5 billion per day over the past year. This has raised concerns about the nation’s economic stability.

Even IMF deputy chief Gita Gopinath has emphasized the urgency of reducing the federal deficit from its current 7% of GDP, warning that the U.S. cannot sustain such a large deficit.

These warnings have been echoed by prominent figures like Tesla Inc. CEO Elon Musk, who has expressed concern about the future of the U.S. dollar amid the escalating national debt.

Read Next: Federal Reserve Dismisses Rate Hike Fears, Labor Market Cools, Apple Lures Investors With Record-Breaking Buyback: This Week In The Market

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In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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