Treasury Secretary Janet Yellen said the prospect of higher interest rates over the long term makes it difficult to contain U.S. borrowing needs, raising the importance of raising revenue in negotiations with Republican lawmakers.
“We have raised our interest rate forecast,” Yellen said in an interview with Bloomberg News on Friday. “It matters. This makes it a little more difficult to control deficits and interest costs.”
Yellen was referring to the Biden administration’s budget proposals, which she said will ensure the country remains on a sustainable fiscal trajectory. She repeated her emphasis on inflation-adjusted interest payments relative to GDP. The ratio jumped last year, but the White House expects it to stabilize at about 1.3% over the next decade.
“I don’t have a hard and fast rule, but I wouldn’t want it to go above 2%,” she said in her most specific comments yet on the benchmark. She previously said the administration’s projections resulted in “historically normal” debt costs.
In contrast, economists at Goldman Sachs Group Inc. see that the ratio exceeds this figure. tolerance zone– Net real interest payments are projected to reach 2.3% by 2034. That’s according to a new analysis published Wednesday. Five years ago, the bank’s forecast was at 1.5%.
Rising interest rates are the main reason for the worsening outlook. Beginning in 2022, the Federal Reserve aggressively raised rates to combat inflation, making it more expensive for the government to service its debt.
In its latest annual budget proposal, the White House forecast the 10-year Treasury yield. by 3.7% in the early 2030s—almost a full percentage point higher than in 2.8% saw it in his proposal three years ago. In those longer-term forecasts, Treasury bill rates, which closely match the Fed’s benchmark rate, rose about half a percentage point.
“We have included many deficit reduction measures in the budget to keep interest costs at levels that we believe are fiscally responsible,” Yellen said. She spoke to Bloomberg News in Stresa, Italy, on the sidelines of a meeting of the Group of Seven finance ministers and central bank governors.
“We’re going to start negotiating taxes,” Yellen said, hinting at a looming legislative battle over the 2017 tax cuts passed under former President Donald Trump that are set to expire at the end of 2025.
While Trump has promised to extend the cuts, President Joe Biden wants to keep the cuts limited to those making less than $400,000 a year. As for the revenue from the tax cuts that won’t be extended, Yellen said in an interview that “some of it probably needs to be used” to reduce the deficit.
Yellen said it would “also be necessary” to pay for the reserves, which are extended by new revenue. One way to help a fund implementing global corporate minimum tax agreement She said. “You need to do more, but you have to pay for it.” On Saturday, she said the United States was not ready to sign the final version of the agreement.
Biden’s budget released in March also includes tax hikes on capital gains and on households worth at least $100 million, among a slew of revenue-raising proposals opposed by Republicans.
Furman’s doubts
Yellen noted that “if we returned to a world of zero interest rates and thought that was a long-term sustainable situation,” the path for net federal interest spending would be lower.
Her views on how borrowing costs will turn out over time appear to have changed. Last October, she said it was “quite possible that we will see long-term yields decline,” as many main trends what made them depressed in the past was “still there“
While many observers focus on the overall debt-to-GDP ratio, Jason Furman and Lawrence Summers of Harvard University argued in a 2020 paper that policymakers should instead focus on preventing real net interest from rising above 2% of GDP. Summers, a former Treasury secretary, is a paid correspondent for Bloomberg TV.
Furman, the former White House chief economist in the Obama administration, said last year that the 2% target is not set in stone.
“It’s based on the experience of other countries, the historical experience of the United States, our gut feeling,” Fuhrman said in an interview last May. “I’m not sure that’s right.”