The Obama administration was the beneficiary of unprecedented low interest rates, which helped keep the economy moving, but more importantly for the former administration’s big-government agenda, kept borrowing rates low for the Treasury. The Trump administration will have to deal with the fallout of Obama’s big spending and borrowing ways as interest rates rise. The Editors of the Wall Street Journal write:
While Mr. Obama was doubling the national debt over eight years, the Fed’s monetary policies spared him from the fiscal consequences. The Fed’s near-zero policy kept interest rates at historic lows that reduced net interest payments even as the overall debt increased. The Fed’s bond-buying programs also earned money that the Fed turned over to Treasury each year, reducing the size of the federal budget deficit by tens of billions of dollars.
This not-so-free Fed lunch is starting to end. CBO estimates that $160 billion more spending will be required each year over the next decade if interest rates are merely one percentage point higher than in its current projections. As interest rates rise, the Fed will also have to pay banks more to keep excess reserves parked at the central bank. After its latest rate increase in March, the Fed now pays banks 1% on reserve balances or about $20 billion a year, and that will go up.
Fed officials are also now hinting that this year they may finally stop buying new securities when the current bonds on its balance sheet come due. This is necessary and long overdue, but it will mean smaller Fed contributions to the federal budget than the more than $90 billion the Fed has turned over in recent years. (See the nearby chart.)
All of this is set to explode on President Trump’s watch, and it will complicate the task for Republicans as they try to reform the tax code within tighter budget constraints.
Read more here.