"US Long-Term Interest Rates Expected to Remain High for Extended Period Even if Fed Lowers Rates"

National Finance Center Report on 'Evaluation and Impact of the US Fiscal Situation'

Amid the severe fiscal deficit in the United States, concerns over the supply-demand imbalance of U.S. Treasury bonds and the long-term borrowing stability of the government could lead to an expansion of the term premium, resulting in long-term interest rates remaining high for a considerable period even if the U.S. lowers interest rates in the future.

On the 9th, the International Finance Center stated in its report titled "Assessment and Impact of the U.S. Fiscal Situation" that "While the U.S.'s expansionary fiscal policy is showing significant domestic demand stimulation effects, negative repercussions such as inflationary pressures and rising long-term interest rates are also increasing."

According to the report, the fiscal deficit, which had slightly decreased after the COVID-19 pandemic, expanded again in 2023 (October 2022 to September 2023) due to reduced revenue and increased interest costs, and government debt rose to an all-time high.

The U.S. fiscal balance deficit expanded to a record high of 15% of Gross Domestic Product (GDP) in 2020 ($3.1 trillion), then shrank to half that level in 2022, the first year of the Biden administration, before expanding again in 2023.

Federal government debt increased to a record high of $26.3 trillion in 2023, a 58% increase compared to 2019. Due to the expansion of debt and rising interest rates, net interest payments nearly doubled from $345.5 billion in 2020 to $710 billion in 2023.

Researcher Park Mijeong of the International Finance Center forecasted, "Given the difficulty of expecting a political consensus to improve the U.S. fiscal situation in the short term, fiscal soundness deterioration is inevitable in the medium to long term due to factors such as population aging, rising interest costs, and the impact of Bidenomics investment policies."

In the short term, the fiscal balance in 2024 may improve somewhat due to discretionary spending limits under the Fiscal Responsibility Act, increased capital income tax revenue, and the resumption of tax payments in disaster areas; however, the report judged that the possibility of a fundamental shift in fiscal policy until 2025 is limited.

From a medium to long-term perspective, the report anticipated that the fiscal deficit would approximately double over the next decade due to population aging, climate change investments, and rising interest costs, with government debt increasing annually.

In particular, while the U.S.'s expansionary fiscal policy contributes to robust economic growth, considering the deteriorating supply-demand conditions in the Treasury market and excessive government debt, the growth contribution effect is expected to gradually become constrained.

It explained that the Federal Reserve's stance on maintaining high interest rates and quantitative tightening (at $60 billion per month), combined with increased federal government Treasury issuance, is likely to intensify upward pressure on Treasury yields and exacerbate the government debt burden, creating a vicious cycle.

However, even if the economic stimulus effect of government spending diminishes from the fourth quarter, U.S. infrastructure investment and laws such as the Infrastructure Investment and Jobs Act (IIJA), climate change response (IRA), and semiconductor (CHIPS Act) industrial policies are expected to support private investment for a considerable period.

Researcher Park said, "As concerns about the U.S. fiscal situation are expected to grow further, attention should be paid to the negative impacts on global financial markets and the U.S. sovereign credit rating. If concerns over the U.S. Treasury supply-demand imbalance and the government's long-term borrowing stability lead to an expansion of the term premium, long-term interest rates may remain high for a considerable period even if a monetary policy pivot occurs in the future."

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