Treasury Secretary Janet Yellen said the prospect of higher interest rates in the long term makes it more difficult to contain the United States’ borrowing needs, increasing the importance of increasing government revenue in negotiations with Republican lawmakers.
“We raised the interest rate forecast,” Yellen said in an interview with Bloomberg News on Friday. “That makes a difference. It makes it a little more difficult to keep deficits and interest spending under control.”
Yellen was referring to the Biden administration’s budget proposals, which she said are designed to ensure the country stays on a sustainable fiscal path. She reiterated her emphasis on inflation-adjusted interest payments as a percentage of GDP. That ratio rose sharply last year, but the White House expects it to stabilize at around 1.3% over the next decade.
“I don’t have a hard and fast rule, but I don’t want to see rates go above 2%,” she said in her most specific comment yet on the policy. She had previously said the government’s projections produced “historically normal” debt costs.
In contrast, Goldman Sachs The economists at Group Inc. assume that the ratio Tolerance zone– It forecasts that net real interest payments will reach 2.3% by 2034. This is according to a new analysis published on Wednesday. Five years ago, the bank had forecast 1.5%.
Rising interest rates are a major reason for the worsening outlook. The Federal Reserve has raised interest rates massively starting in 2022 to combat inflation, making it more expensive for the government to service its debt.
In its latest budget draft, the White House forecast yields on 10-year US Treasury bonds at 3.7% in the early 2030s – almost a full percentage point higher than the 2.8% in their proposal three years ago. Treasury rates, which are closely aligned with the Fed’s benchmark rate, have risen by about half a percentage point in these longer-term projections.
“We have included many deficit reduction measures in the budget to keep interest spending at a level that we believe is fiscally sustainable,” Yellen said. She spoke to Bloomberg News in Stresa, Italy, on the sidelines of a meeting of G7 finance ministers and central bank governors.
“We will open tax negotiations,” Yellen said, alluding to the impending legislative battle over the tax cuts passed in 2017 under former President Donald Trump that expire at the end of 2025.
While Trump has promised to extend the cuts, President Joe Biden wants to keep the cuts only for those earning less than $400,000 a year. As for the revenue from tax cuts that are not extended, Yellen said in the interview that “some of it will probably have to be used” for deficit reduction.
Yellen said it will also be necessary to finance the extended provisions with new revenues. One way to finance this is through the implementation of the global corporate tax law. Minimum tax agreements, she said. “More needs to be done, but you have to pay for it.” On Saturday, she said the US was not yet ready to sign the final version of the agreement.
Biden’s budget, Approved The bill, announced in March, includes a number of revenue-raising proposals that Republicans oppose, as well as tax increases on capital gains and on households with assets of at least $100 million.
Furman’s doubts
Yellen noted that “if we were back in a zero-interest world and assumed that this was a sustainable situation over the long term,” the federal government’s net interest costs would be lower.
Her views on how borrowing costs will settle over time appear to have changed. Last October, she said, “It is quite possible that longer-term yields will fall,” as many Fundamental trends that had depressed her in the past were “still there.”
While many observers focus on the debt-to-GDP ratio, Jason Furman and Lawrence Summers of Harvard University argue in a 2020 article that policymakers should instead focus on limiting the rise in real net interest rates to above 2% of GDP. Summers, a former Treasury secretary, is a paid contributor to Bloomberg TV.
Furman, a former White House chief economist in the Obama administration, said last year that the 2 percent mark was not a sacred pillar.
“It’s based on looking at the experiences of other countries, the historical experiences of the United States, our gut feeling,” Furman said in an interview last May. “I’m not sure it’s right.”