Powell’s Rate Cut Won’t Save Washington from Its Trillion-Dollar Interest Burden

The U.S. is set to spend nearly $1 trillion this year on interest payments alone – and Fed Chair Jerome Powell’s long-awaited rate cut won’t change that reality.

Debt Keeps Washington Trapped Despite Fed’s Moves Powell’s latest rate cut may grab headlines, but more than 80% of federal debt is tied up in long-term bonds with maturities ranging from 2 to 30 years. Their rates were locked in when first issued, meaning short-term adjustments won’t touch those old contracts. “You’re not going to drastically change deficits nearing $2 trillion. The change in rates is too small to matter against such a huge debt pile,” warned Jessica Riedl of the Manhattan Institute.

Short-Term Relief? Just a Drop in the Bucket The real effect only applies to short-term Treasury bills with maturities of just a few weeks, which immediately reflect Fed rate changes. But they represent just a fraction of the overall U.S. debt. The bulk remains trapped in older, costlier contracts. Investors, meanwhile, are demanding higher yields due to persistent inflation risks and skepticism over Washington’s fiscal path. That keeps the government’s long-term borrowing costs high.

Interest Payments Now Surpass Defense Spending Today, the U.S. spends more on interest than on defense. One out of every seven dollars in the federal budget goes to debt service. Half a century ago, interest payments were only half the size of the military budget – now they’ve overtaken it. Debt has ballooned thanks to years of tax cuts, rising social program costs, pandemic spending, and the lingering effects of the 2008 financial crisis. U.S. public debt is now approaching 100% of GDP, nearing the post–World War II peak of 106%. Even a small 0.1% rate shift could cost the U.S. $351 billion over 10 years, according to the Congressional Budget Office – more than the government saves by cutting EV and solar subsidies.

Trump: Powell Is Moving Too Slowly Donald Trump continues to hammer Powell, accusing him of cutting rates far too cautiously. He claims the U.S. could save $900 billion annually if the Fed slashed rates by 3 percentage points. But that would require a twelvefold deeper cut than Powell just delivered – and it would only work if long-term yields collapsed as well, something that almost never happens. In reality, 10-year Treasury yields have hovered between 4.0% and 4.7% this year. They briefly dipped after Powell’s announcement, only to bounce back above 4.1%. Investors still expect inflation and remain unconvinced Powell’s moves are enough.

What Washington Can Do The Treasury is exploring issuing more short-term bills, which respond faster to Fed policy. Some even speculate that the rise of stablecoins could increase demand for short-term Treasuries. But relying too heavily on short-term debt carries risks. If rates rise quickly, the government could be trapped paying even more. Issuing more long-term debt would have been smarter during the pandemic, when rates were near historic lows – but Washington missed that window. Bank of America data shows the average interest rate on Treasuries dropped from 2.5% to just 1.7% in early 2022. By March this year, it had already climbed back above 3% and is still rising. “There was a chance to refinance at cheaper levels, but we didn’t take it far enough,” said Gennady Goldberg, U.S. rates strategist at TD Securities.

Bottom line: Powell’s cut is more symbolic than impactful. America remains crushed by its historic debt load, with interest payments now its biggest budgetary burden. Trump wants aggressive cuts, but the math shows reality won’t bend so easily.

#Powell , #FederalReserve , #Washington , #TRUMP , #bondmarket

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