We believe it is likely that the Fed will lower its Fed Funds Rate faster than what it outlined in Wednesday’s FOMC projections given that the interest expense scenarios on the Treasury Debt that we have outlined below are fiscally unsustainable. The average interest rate on Treasury Debt will climb higher if the Fed holds its Fed Funds Rate at elevated levels. Higher interest expense will crowd out Government spending in other areas as long as rates remain elevated. The average interest rate on Treasury debt sat at 2.92% as of 08-31-2023. The average interest rate will climb higher as lower rate Treasury debt matures and rolls over at higher rates.

• Treasury debt sits at $33.1 Trillion. For this exercise, let’s assume that Treasury debt holds fixed at $33.1 Trillion. Below we calculate the annual interest expense on Treasury Debt at various blended average interest rates:

It is easy to see how the interest expense on the Treasury Debt quickly eats up Government tax receipts as the average interest rate climbs higher. Interest expense climbs from $967 billion at 2.92% to approximately $2 Trillion at 6.00% (Fed Funds Rate sits at a 5.25-5.50% range).

For this reason we believe that Federal tax rates will move higher. We also believe that the Fed will lower its Fed Funds Rate faster than what was outlined in Wednesday’s FOMC projections (HERE, page 2 of the PDF).

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