Fed Paper Bombshell: US Can Hit 250% Debt-to-GDP Without Spiking Interest Rates
Federal Reserve researchers drop explosive analysis—turns conventional debt wisdom on its head.
The Unthinkable Threshold
New modeling suggests the United States could carry a staggering 250% debt-to-GDP ratio without triggering runaway interest rates. That’s two-and-a-half times the entire annual economic output—stacked as sovereign IOUs.
Mechanics of the Debt Miracle
Global demand for dollar-denominated safety creates a unique buffer. Foreign central banks and institutional investors keep snapping up Treasuries—even as the pile grows. The exorbitant privilege of issuing the world’s reserve currency, folks.
Market Reality Check
No free lunch, though. Servicing that debt still sucks fiscal oxygen—diverting funds from infrastructure, education, or tax cuts. But hey, at least Wall Street bond traders get to keep their bonuses. Because nothing says 'financial stability' like leveraging the future to pay for the present.
Fed paper ties ballooning debt to future rate pressure
Right now, that tipping point hasn’t arrived. The public currently holds US government debt equal to 97% of GDP. The One Big Beautiful Bill Act, signed into law by Republican lawmakers in July, added fuel to the fire.
When the Congressional Budget Office (CBO) ran its numbers back in January, it expected the debt ratio to reach 117% by 2034. But after that legislation passed, the CBO added another 9.5 percentage points to its projection.
The research team looked all the way out to 2100. Their conclusion? It’s technically possible to reach a debt-to-GDP ratio of 250% by the end of the century and still maintain today’s low rates. But they were blunt: getting there requires cutting the fiscal gap by at least 10% of GDP.
No one in Washington is currently doing that. As Straub explained, “The longer this adjustment is delayed, the more government debt supply outstrips its demand, eventually making government debt unsustainable.”
Meanwhile, the government’s interest payments are exploding. Over the last 12 months, the US Treasury has paid $1.2 trillion in interest. If the Fed holds rates steady, that number will rise to $1.4 trillion by 2026.
That’s because the average maturity of government debt is about 5 to 6 years, and right now the 5-year yield sits near 3.8%. To prevent interest costs from snowballing, the yield needs to drop below 3.1%. That WOULD require the Fed to cut interest rates by at least 75 basis points, and soon.
Powell pivots toward jobs as labor data falls apart
Fed Chair Jerome Powell has signaled the central bank is ready to do just that. He’s shifting attention away from inflation and toward jobs. In his own words, “The shifting balance of risks may warrant adjusting our policy stance.” That’s Fed-speak for “We’re about to cut.”
This isn’t because inflation has cooled. It hasn’t. CPI has stayed above 2% for 53 months straight, and PPI inflation just jumped 0.9% month-over-month, the biggest increase since 2022. Core CPI is also back over 3%.
But job numbers are crumbling. In the last update, 258,000 jobs were erased from May and June reports, and so far in 2025, 461,000 jobs have been revised away. That’s more than the population of Scottsdale, Arizona.
The Fed is spooked. Its job is to balance inflation and employment, but since 2021, it’s been obsessed with inflation. Now, Powell clearly sees unemployment as the bigger threat. That’s why the rate cut is coming.
The stock market will cheer, because every time the Fed cuts while the S&P 500 is within 2% of record highs, the market pops. According to Carson Research, this MOVE has happened 20 times, and the average return 12 months later is +13.9%.
But that’s great news only if you own assets. Most Americans don’t. And as in the post-COVID run-up, wage growth won’t keep up with inflation, and the wealth gap will widen. This dynamic is almost guaranteed to repeat. Those at the top will feast while the bottom half sinks under higher living costs.
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