Fed Rate Hikes Drive Up Debt Costs, Risking Budget Deficits and Market Volatility
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The Federal Reserve's shift from easy money policies to aggressive rate hikes has led to a surge in interest costs on the national debt, exacerbating the budget deficit.
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With debt service costs skyrocketing, another bond market sell-off could occur when tax cuts that raise the deficit come up for renewal after 2024.
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Unlike in the past, the Fed may not aggressively cut rates to counter economic weakness since that could fuel inflation, meaning more volatility ahead.
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If bond vigilantes drive up Treasury yields to alarming levels, measures like yield curve control rather than quantitative easing may be deployed.
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This could all lead to shorter economic expansions and choppier seas for the economy and stock market compared to the low rate, low volatility environment of the past decade.