A Fed paper says the US can hit 250% debt-to-GDP without spiking interest rates

A new paper presented at the Federal Reserve’s Jackson Hole summit says the United States could pile up government debt equal to 250% of its economy without forcing interest rates to rise, so long as the demand for Treasury bonds keeps up.

This projection came from Adrien Auclert of Stanford, Hannes Malmberg of the University of Minnesota, Matthew Rognlie of Northwestern, and Ludwig Straub of Harvard, who ran the scenario at the annual gathering of global central bankers.

Straub, who spoke for the group at the Wyoming event, explained the setup: “Until fiscal consolidation occurs, there will be a race between the rising asset demand of an older population and the rising debt issuance needed to finance the associated increase in government expenditures.”

In simple terms, as older Americans look for safe places to park their money, they could keep buying government bonds even while Washington keeps borrowing more. But Straub warned that “without large adjustments, the supply of debt will eventually outrun demand, forcing interest rates to rise.”

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.

If you're reading this, you’re already ahead. Stay there with our newsletter.