English (India)

The Fed has to keep low-interest-rate till at least 2025

calendar 23/09/2020 - 15:27 UTC

On Monday, the U.S. CBO (Congressional Budget Office) has projected the U.S. government debt will hit almost 200% of GDP by 2050 vs earlier projection of ‘just’ 180%. The budget/fiscal deficit may hit 13% by 2050. The U.S. may be in a fiscal crisis in the days ahead if it can’t improve its finances/revenue and cut discretionary spending. The CBO director said that the low borrowing cost indicates that the debt is manageable for now and that fiscal policy could be used to address national priorities. But the CBO also said the budget path is unsustainable over the coming decades. And borrowing costs will eventually rise and become an issue.

The U.S. CBO budget projection at a glance:



At a glance, the U.S. pays over 10% of its revenue as interest (mainly on UST debt), and going forward, as budget deficit will be elevated till at least 2025 due to the corona stimulus and Trump tax cut, the Fed will ensure lower borrowing costs by keeping rates and bond yields near zero. After 2025, Trump tax cut may be withdrawn or if Biden wins in Nov, he may slap some additional taxes on the super-rich.

The market is concerned about the willingness or ability to finance ‘Uncle Sam’ (U.S. growth story) by other countries ( traditional lenders) like China, Japan, and Europe amid rising cold/trade war tensions and their own structural issues, like aging demography. But in any way, as long as the U.S. is able to print UST in USD, the number one global reserve currency and kept itself as the number one superpower, there is not so much worry. But, the Fed will never employ NIRP or even YCC as it has to keep the UST coupon/bond yield attractive enough for the angel investors; otherwise, who will invest in ‘America Growth Story’?

Apart from the power of USD and perpetual demand as the world’s settlement currency, the U.S. has another advantage of negligible (lower) inflation, and lower borrowing costs (bond yields) - allowing taking higher debts to support the ‘America Great’ story. The U.S. inflation is low because of higher USD relative to Asian/Chinese exporters’ currency (like Yuan) and lower import cost of consumer as-well-as industrial goods. Thus, despite various rhetorics for domestic political compulsion, both the U.S. and China are dependent on each other for growth and prosperity. So, both U.S. (Trump) and China (Xi) will never cross the red line despite the ongoing war of words.


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