By Howard Wang of Convoy Investments
Jerome Powell has been talking tough on inflation and clearly wants to leave a Volcker-like legacy. But the US is far different today than it was in the 80s. The recent Q3 US government borrowing report may throw a wrench in his plans.
US debt servicing costs skyrocketed in Q3 as the rate shock propagated to the $31 trillion worth of federal debt, a number that continues to grow at a $1.5 trillion per year clip. Because of the high debt base, any small changes in average financing rate has a huge impact on ultimate debt costs to the government.
This number will only worsen as we continue to retire cheaper old debt and replace it with costlier new debt.
If the current ~4.5% average yield curve rate propagates to all $31 trillion worth of debt, we are looking at $1.4 trillion per year just in interest payments. This would be 29% of the 2022 FY total Federal tax receipt.
The US government may become the most leveraged and vulnerable player to rate shocks. When you rack up the kinds of debt that our government has, you can lose the luxury of rapidly clamping down on inflation like Volcker did in the 80s. I wouldn’t be surprised if Yellen is, along with the rest of the market, privately begging Powell to slow down.