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The United States' national debt has skyrocketed to $35.46 trillion, a staggering increase of almost $3 trillion since 2022. Rising interest rates are largely to blame for this surge, creating a vicious cycle that's plunged the country into a real debt crisis. To make matters worse, the Treasury must issue even more debt to cover higher interest payments, perpetuating the cycle.

The Federal Reserve's Dilemma

The Fed's expected rate cuts may offer temporary relief to the Treasury by easing interest expenses . However, recent speeches from Fed committee members suggest a more complex plan. They may be positioning themselves to enable the Treasury to borrow even more, potentially by creating a crisis.

Rising Interest Costs

The Fed's rate hikes have pushed average interest on US government debt from 1.61% in 2021 to 3.32%, inflating debt service costs. By 2024, these costs are expected to consume 17% of federal spending. This surge in interest costs threatens to crowd out essential public investments, potentially stifling economic growth.

Quantitative Tightening and Liquidity

The Fed's shift from Quantitative Easing (QE) to Quantitative Tightening (QT) has decreased market liquidity. While past QE rounds still provide ample liquidity, it's largely locked in the Fed's overnight reverse repurchase (RRP) market, earning interest. As excess liquidity in the RRP market dwindles, the Fed may strategically lower interest rates on RRP accounts to draw funds back into the market.

The Focus on Short-Term Treasuries

The Fed aims to increase its holdings of short-term Treasury securities, enhancing flexibility. With only 4.5% of the Fed's portfolio in short-term Treasuries, rebalancing to shorter-term securities could stabilize the bond market and alleviate the Treasury's interest expenses.

A Risky Strategy

If a crisis enables the Fed bring rates to zero, the Treasury could capitalize on low rates by issuing long-term debt. However, this money-printing maneuver risks reigniting inflation, impacting the stock market and real economy. The Fed's strategy may lay the groundwork for another Maturity Extension Program (MEP), providing cheap, long-term borrowing for the Treasury, but at what cost?

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