Treasury Secretary Janet Yellen said expectations of higher long-term interest rates make it difficult to contain U.S. borrowing needs, making a revenue boost more important in negotiations with Republican lawmakers.
“We raised interest rate expectations,” Yellen said Friday in an interview with Bloomberg News. “It doesn't make a difference. It makes it somewhat more difficult to keep the deficit and interest expenses under control.”
Yellen was referring to the budget proposals presented by the Biden administration, which she said ensured the country remained on a sustainable fiscal path. It reiterated its emphasis on the measure of inflation-adjusted interest payments compared to gross domestic product. This percentage 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 rule, but I wouldn't want to see it go beyond 2%,” she said in her most specific comments yet on the guide. It has previously said that management's forecasts generated “historically normal” debt costs.
In contrast, economists at Goldman Sachs Group believe that the ratio is higher Tolerance zone– Net real interest payments are expected to reach 2.3% by 2034. This was stated in a new analysis released on Wednesday. Five years ago, the bank's forecast was 1.5%.
High interest rates are a major reason behind the deterioration in expectations. The Fed has aggressively raised interest rates starting in 2022 to combat inflation, making it more expensive for the government to service its debt.
In its latest annual budget proposal, the White House projected 10-year Treasury yields by 3.7% In the early 2030s – almost a full percentage point higher than 2.8% He was seen proposing three years ago. Interest rates on Treasury bonds, which closely track the Federal Reserve's benchmark rate, rose about half a percentage point in that longer-term forecast.
“We have included a lot of deficit reduction measures in the budget in order to keep interest expenses at a level that we believe is fiscally responsible,” Yellen said. She was speaking with Bloomberg News in Stresa, Italy, on the sidelines of the G7 meeting of finance ministers and central bank governors.
“We will open tax negotiations,” Yellen said, referring to the looming legislative battle over tax cuts passed in 2017 under former President Donald Trump that are scheduled to expire at the end of 2025.
While Trump has pledged to extend the cuts, President Joe Biden wants to keep the cuts only for those earning less than $400,000 a year. As for revenue from the tax cuts that were not extended, Yellen said in the interview that “we may need to use some of it” to reduce the deficit.
Yellen said “it will also be necessary” to pay for appropriations that are extended through new revenues. One way to help fund this is to implement global companies minimum tax transaction, She said. “You have to do more than that, but that's the pay.” She said on Saturday that the United States is not ready to sign the final version of this agreement.
Biden's budget Released It also includes increasing taxes on capital gains and on households worth at least $100 million, among a slew of revenue-raising proposals that Republicans oppose.
Foreman's doubts
“If we go back to a zero-rate world, and we believe that this is a sustainable situation over the long term,” Yellen noted, the path to net Fed interest costs will be lower.
Its views on where borrowing costs will stabilize over time appear to have changed. Last October, she said: “It is quite possible that we will see a decline in long-term returns,” as is the case with many. Basic trends What made them depressed in the past was “I'm still here“.
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 look to prevent net real interest from rising above 2% of GDP. . Summers, a former Treasury secretary, is a paid contributor to Bloomberg Television.
Furman, a former White House chief economist in the Obama administration, said last year that 2% is not sacrosanct.
“It depends on looking at experiences in other countries, the historical experience in the United States, and our gut instinct,” Foreman said in an interview last May. “I'm not sure that's true.”