Treasury market volatility has rarely been lower since the Fed hiked rates two years ago, partially due to a'stronger for longer' economy and cooling inflation at target.
To manage the deficit and debt, stronger long-term growth may be necessary, without significant tax hikes or changes to mandated expenditure programs like Social Security.In February, San Francisco Fed economists argued that economic growth relative to interest rates will determine the debt-to-GDP ratio for the next few decades.
"New technological advances, such as artificial intelligence, could fuel a productivity-led boost to long-run economic growth" .
Debt sustainability depends on nominal GDP growth exceeding nominal federal debt interest rates or real GDP growth exceeding real borrowing costs. Key measures include the primary budget balance, which excludes interest payments.
The CBO's latest long-term predictions show persistently huge deficits, record interest payments as a proportion of GDP, and a rising debt-to-GDP ratio.
Recently, billionaire hedge fund manager Geoffrey Gundlach warned that 6% interest rates over the next five years would need "50% of tax receipts would have to go to interest expense... which is completely possible."
Although Fed policy rates don't affect long-term Treasury yields, interest payments seem to go one way. Growth can counteract it, but will it be the proper kind—driven by productivity or immigration?
"If nominal GDP is accelerating because real growth is growing, that's great, but if inflation is rising, you're shooting yourself in the foot," said Ned Davis Research chief global macro strategist Joe Kalish.
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