The Fed isn’t going to cut rates in May. Wages are growing and productivity is growing, too. But it may not be able to cut rates anytime soon. Here’s why:
A record $8.9 trillion of government debt will mature over the next year, see the first chart below. The government budget deficit in 2024 will be $1.4 trillion according to the CBO, and the Fed has been running down its balance sheet by $60 billion per month.
The bottom line is that someone will need to buy more than $10 trillion in US government bonds in 2024. That is more than one-third of US government debt outstanding. And more than one-third of US GDP.
Repeat that trend every year for the foreseeable future. That’s almost $11 trillion every year until 2030. That’s happening at a time when foreign investors have been shrinking their ownership of U.S. bonds since 2015:
So much for the theory that we should not worry about accumulating debt because interest rates would always be low. The theory that demand for any amount of U.S. debt was endless will now be tested at a large scale. Either way, it means that the federal government is refining its debt at a high rate.
There is something else to watch. Tomorrow, the Congressional Budget Office (CBO) will release its new baseline projections for the budget. As Douglas Holtz-Eakin notes in today’s Daily Dish:
Nearly all provisions of the 2017 Tax Cuts and Jobs Act will sunset at the end of 2025, raising taxes by about $3 trillion over the next 10 years. From a budget perspective, this produces a sharp reduction in the deficit and a more favorable overall debt picture. From an economic perspective, this sharp tax increase will be a strong headwind to growth. There is, however, no way that this will happen, so both the budget and economic outlooks will be misleading. Interpret the CBO projections accordingly.
He is right that there is no way all the tax provisions will be allowed to expire. Unless those of us who care about our fiscal trajectory manage to convince Congress that they must offset some of these tax-cut extensions (wish us luck), we will get more borrowing on top of the debt rollover mentioned above.
For all these reasons, and some more, I wouldn’t count on interest-rate cuts for now or declare victory over inflation too soon, either.