With market attention increasingly focused on the size of the federal deficit, interest rate dynamics are shifting.
Josh Cannington, Market Strategist with StoneX, says while the Federal Reserve sets short-term rates, it is the broader picture that is influencing borrowing costs.
“It is absolutely, you know, very top of mind for the Fed, but they have no control over what spending is happening in Washington. Powell has said on numerous occasions that it’s unsustainable, you know, we’re spending money we don’t have, and I don’t know how DOGE impacts that view from Powell at this point. It’s yet to be seen, but I think the marketplace is very aware of the risk that the deficit has.”
He said long-term rates could remain elevated even if short-term economic slowdowns emerge.
“Rates are going to be higher for longer, especially fixed rates, like term debt is never going to get cheap again because the government’s going to keep issuing treasuries, and who’s going to be buying. The marketplace has a, you know, appetite for that stuff for so long, and if no one’s buying that debt, investors are going to demand higher yields to buy it up. It’s just going to be more and more expensive fixed-rate debt out there. So I would say maybe in the short term, things like recessions drive rates lower, but generationally, I think rates are going to naturally creep higher simply because of the deficit.”
New numbers show the federal deficit for fiscal year 2025 reached $1.3 trillion at the end of March, which is 15 percent higher than the same time last year.
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