According to the data from the Fed, the US federal government's debt-to-GDP ratio stood at 129% at the end of last year. As today's chart from the Congressional Budget Office (CBO) shows, the US government's debt is set to rise to 200% by 2050!
In my opinion, this is the key reason why the Fed will simply not be able to afford to raise interest rates substantially, even if the inflation rate significantly overshoots the Fed's target. Using simple mathematics, we come to the conclusion, for example, that if the Fed raised the fed funds rate by one percentage point and this upward movement was followed the entire yield curve of US government bonds, annual interest costs in relation to GDP would increase very significantly, approximately by 1.3% in absolute terms.
So the US government debt is so huge at the moment that the US government simply cannot afford a significantly higher debt service. And the Fed is, of course, well aware of this fact. At the same time, my baseline scenario assumes that the inflation rate, not only in the USA, will continue to rise significantly in the coming months. The media will therefore wildly speculate on whether or not the Fed will raise key interest rates. However, the reality will most likely be such that, in the best case, US interest rates will be expected to rise by a maximum of half a percentage point over the next few years. More certainly not, because such an increase would be downright deadly to the sustainability of US government debt.
Investment Strategist at Conseq Investment Management, a.s.