- NEW from me. Trump wants to take over the Federal Reserve and lower interest rates in part because he believes it will cut federal budget interest costs by "$1 Trillion per year." In @thedispatchmedia.bsky.social, I show that fiscal dominance would NOT reduce interest costs very much. 🧵
- First, yes, interest costs are burying the budget. 2021 - $352 billion 2025 - $1 trillion (approx) 2035 - $2 trillion (projected) Interest has soared past Medicaid, defense, and Medicare to become the second-biggest item in the federal budget.
- $9 trillion of the federal debt will roll over in the next year, plus $2 trillion in new borrowing equals $11 trillion subject to new interest rates. Also, the market determines the interest rate paid by the Treasury on its debt, and the Fed Funds rate has limited impact there.
- In fact, inflationary cuts in the fed funds rate may raise - not lower - long-term interest rates. Thus, I estimate even a *full-point* cut in the Fed funds rate would save maybe $44 billion next year. White House OMB data shows even less savings. That's out of a $7T budget.Sep 23, 2025 16:36
- If we want lower interest rates on the debt, back in the 2010s the Treasury missed the opportunitiy to lock more of its debt into 2-3% rates for 30 years. Some of us were screaming back then to do this.
- Overall, fiscal dominance is a dangerous consequence to soaring debt - it paralyzes the Federal Reserve and kills its ability to slow inflation and stabilize the economy. We saw this after World War II.
- It's a lazy gimmick to think we can keep cutting taxes and expanding spending and just pay for it by forcing the Fed to make government borrowing nearly free. Politicians need to stop looking for easy, fake solutions and make the tough decisions on deficits. (/F)
