MNI INTERVIEW: Fed Cuts Won't Change Debt Track- Ex-CBO's Hall
MNI (WASHINGTON) - The start of the Federal Reserve's interest rate easing cycle will reduce near-term pressures on America's annual deficit but the amount of debt in recent years has gone up so much that even lower interest rates will see higher fiscal costs, the former Director of the Congressional Budget Office Keith Hall told MNI.
"Actually the interest rate is really important for the debt just because we have such a large, very high level of debt that these changes in the interest rates have a lot more effect now than they used to," he said in an interview. "We're just going to continue to watch a greater and greater portion of the federal budget go towards paying off old debt, which is unfortunate."
The Congressional Budget Office projected in June that annual net interest costs would total USD892 billion in 2024, before reaching USD1.7 trillion in 2034 and totaling USD12.9 trillion over the next ten years. The 4.1% of GDP in net interest payments in 2034 is almost double the 2.1% average from 1974 to 2023, and the projection includes the assumption that the Fed's short-rate will fall and average around 3.0% in coming years.
HALF OF DEFICIT
The deficit for the fiscal year to-date through August was USD1.897 trillion. Interest expenses on the USD 28 trillion national debt continue to grow rapidly, rising 30%from last year to USD1.049 trillion for the first eleven months of the fiscal year. The weighted-average interest rate on Treasury securities has doubled to 3.3% from 1.6% in early 2022.
"Borrowing at a high level when there's no recession, there's no emergency, is to me troubling, but almost half of that deficit this year is borrowing just to pay off old debt," he said. "We're going to have to get used to that, because that's the way it looks like it's going to be going forward with such high debt."
Hall said lawmakers in Washington need to consider the underlying drivers of U.S. deficit spending, an idea he contends is gaining some support among backbenchers.
"We only look at discretionary spending on an annual basis, and that's roughly 30% of the budget and 70% doesn't get touched. Everything from Social Security to Medicare doesn't get touched on an annual basis," he said. "They really need to cross that line and start thinking about what they are going to do with that." (See: MNI INTERVIEW: US Budget Deficit Unsustainable - Ex-CBO Chief)
In the near-term, the economic outlook still seems to be holding up, said Hall, who was also chief economist at the White House Council of Economic Advisers from 2005-2008.
The Federal Reserve was right to get ahead of downside risks last week with a larger 50 basis point interest rate cut but should slow down its easing. "I would hope they'd be a little more reluctant to do more until they see what kind of an effect this is going to have."
SOURCE OF VOLATILITY
Hall, a former commissioner of the Bureau of Labor Statistics, also expressed concern about the state of data in the U.S. and the lack of support among legislators for spending on data infrastructure.
"I'm concerned that they've sort of been slowly starving the budgets for a long time now, and now it's finally catching up, and this declining response rates that's been a problem for decades," he said. "There's so many other budget issues and issues of the budget process that worrying about something small, like the Bureau of Labor Statistics relative to the size of the debt, is not getting much attention." (See: MNI INTERVIEW: US Data Already Suffering From Underinvestment)
It is mission critical for BLS and the other statistical agencies to have the trust of data users and data providers, but declining response rates and strained budgets will lead to policymaker uncertainty, like at the Fed, he said. "The volatility is a real concern."