The presidential election has brought the issue of the federal budget deficit back into the spotlight as markets weigh the impact of another Biden or Trump administration on government revenues and spending.
One week before last Thursday presidential debateCongressional Budget Office has updated its prediction on US debt and deficit.
The New CBO Estimates for the 2024 fiscal deficit is now $1.9 trillion, up from the previous deficit of $1.6 trillion announced in February and up from a deficit of about 1.7 trillion USD in 2023.
While the 2024 figure falls short of the pandemic-era peak of $3 trillion, $1.9 trillion is almost on par with Russia’s entire GDP. World Bank offers $2 trillion by 2023, becoming the 11th largest economy in the world.
Part of the reason the deficit is projected to increase in 2024 is to account for emergency spending to help Ukraine counter Russia, the CBO said. Other emergency allocations go to Israel and U.S. allies in Asia.
Meanwhile, the US deficit exceeds that of other major economies such as Mexico ($1.79 trillion), Australia ($1.72 trillion) and South Korea ($1.71 trillion). ).
Right now, financial markets are more focused on inflation data and when the Federal Reserve will cut interest rates. But that doesn’t mean there aren’t risks from growing deficits and debt.
Former New York Fed President Bill Dudley told Bloomberg TV on Wednesday that unsustainable trends always have an end.
He also warned that the situation could quickly deteriorate. For example, if the bond market begins to hesitate to buy Treasury bonds, interest rates will rise to attract more demand. That would force the government to pay more in debt service costs, which would then add to the deficit.
“So the feedback loop here can be quite devastating,” said Dudley. “The difficult thing is knowing the timing.”
He added that demand for US Treasuries in some global markets is falling as Western sanctions against Russia have prompted other countries to diversify their portfolios away from dollar-denominated assets.
Additionally, debt issued at lower interest rates is now being converted to higher interest rates, so debt service costs are rising faster than total debt, Dudley said.
The election and its aftermath could be a catalyst. Between a Wall Street Journal report That said Trump’s allies have outlined plans to erode the Fed’s independence, an election victory could raise fears the Fed will monetize US debt by buying more bonds Treasury bills and cause inflation.
Dudley pointed out that it certainly won’t be easy to gain control of the Fed because regional bank presidents are not appointed by the White House and Fed governors have uneven terms.
“That said, a mere effort to gain control of the Fed, to reduce the Fed’s independence, could be the spark that shakes the markets,” he added.
