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Fed rate hikes: Wednesday's increase could add $2.1 trillion to federal deficits...

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source link: https://finance.yahoo.com/news/fed-rate-hike-could-add-21-trillion-to-federal-deficits-new-analysis-finds-134413940.html
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Fed-induced recession ‘likely to be more mild in nature’: Economist
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Fed rate hike could add $2.1 trillion to federal deficits, analysis finds

Ben Werschkul
·Washington Correspondent
Thu, September 22, 2022, 3:38 AM·5 min read

The Federal Reserve hiked interest rates by 0.75% on Wednesday, making an aggressive move to tame inflation that could have other side effects — including a possible recession. The rate increase could also explode federal deficits even further in the years ahead.

A new analysis from the budget hawks at The Committee for a Responsible Federal Budget (CRFB) predicts this week’s rate hike alone will add $2.1 trillion to government deficits over the next decade.

That’s on top of a series of hikes we’ve already seen this year that are already set to add trillions more to the deficit in coming years. The central bank concluded its two-day policy meeting Wednesday by suggesting it could hike rates further in the months ahead.

To be sure, the deficit impact is far from the most pressing concern for policymakers focused on inflation. It nonetheless is a significant factor likely to challenge the Federal Reserve and fiscal policymakers as they try to navigate a “soft landing” that brings down the inflation rate without triggering a recession.

“The irresponsible fiscal policy [of recent years] has made the job of the Federal Reserve many times more difficult," Maya MacGuineas, the president of the CRFB, told Yahoo Finance earlier this week. This challenge, she added, “makes the chance of a recession even more likely.”

The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, D.C., U.S., June 14, 2022. REUTERS/Sarah Silbiger
The Marriner S. Eccles Federal Reserve Board Building in Washington, D.C. in June. (REUTERS/Sarah Silbiger)

The national debt — the total amount of money the U.S. government owes — sits at nearly $31 trillion. Meanwhile, the U.S. has a $1 trillion annual budget deficit, which is the amount of money the U.S. must borrow each year to pay for its expenses. Interest payments on the debt itself are projected to be the fastest-growing part of the federal budget in the years ahead.

“It's as though they're now walking on two different tight ropes at once,” MacGuineas says of the Federal Reserve’s challenges to curb inflation without inflaming the debt even further.

A range of other economists weighed in this week on Yahoo Finance on the chances of a soft landing for the economy on the eve of the Fed’s latest decision. Vanguard Senior International Economist Andrew Patterson said Tuesday that a Fed-induced recession could be hard to avoid in 2023 but the coming downturn “is, based on the data, likely to be somewhat more mild in nature.”


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