An Interest In Debt

This week, central bank officials increased the short-term interest rates by 0.75 percent to a target range of 3.75%-4%. This widely expected rate hike by the Fed aims to reduce inflation, currently at its highest year-over-year level in more than 40 years.

We discuss the effects of interest rates on government debt. For the fiscal year 2022, treasury.gov shows that U.S. debt will be close to $31 trillion with an annual interest payment of $400 billion.

What do interest rates have to do with government debt?

A treasury bill issued last year offered an interest rate of 0.15%. Fast forward to today, and the 1-year treasury is fetching 4.5%. That's a significant increase in the cost of borrowing.

It may be helpful to think of that nearly $31 trillion debt pie in a few slices. Over the next year or so, the government will need to refinance around fifteen percent of this debt at a new, much higher rate. As it stands, an increase in interest rates by the Fed will increase the annual interest payment on new government debt issuances.

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