The Federal Reserve’s decision Wednesday to raise its benchmark interest rate by a quarter percentage point to 4% surprised almost no one.
asserted
decision → raise → one
Economic activity is expanding at a solid pace.
asserted
activity → expand → pace
Capital investment is robust, job gains have kept pace with the workforce, and unemployment has changed little.
asserted
unemployment → keep → workforce
But the White House and Congress should pay attention to another message the Fed is sending: the government cannot count on cheap borrowing anymore.
asserted
government → pay → borrowing
Fed Chairman Kevin Warsh has spent years arguing that the central bank’s balance sheet became too big after the 2008 financial crisis.
asserted
sheet → spend → crisis
Before taking the chair, he called the balance sheet, which is weighed down by $7 trillion of government IOUs, “trillions larger than it needs to be” and advocated a big withdrawal of the Fed’s presence in financial markets.
asserted
it → take → markets
That matters to Congress because the Fed’s post-2008 purchase of Treasury paper pushed down long-term interest rates.
asserted
purchase → matter → rates
The central bank bought trillions of dollars in Treasury securities and mortgage-backed securities to achieve what is called quantitative easing, deliberately removing long-term bonds from private markets.
asserted
what → buy → markets
The Fed’s own research found that those purchases substantially reduced long-term Treasury yields.
asserted
purchases → find → yields
Lower Treasury yields meant cheaper borrowing not just for homeowners and businesses, but also for the federal government.
asserted
yields → mean → government
Congress took advantage of this to ramp up spending.
asserted
Congress → take → spending
At the end of fiscal 2008, gross federal debt stood at roughly $10 trillion.
asserted
debt → stand → trillion
Last month, it crossed $40 trillion.
asserted
it → cross → trillion
Debt held by the public is now roughly equal to the nation’s annual economic output.
asserted
Debt → hold → output
For years, lawmakers could run enormous deficits while interest rates were kept artificially low.
uncertain
rates → run → deficits
This masked some of the cost of borrowing; the principal accumulated, but servicing it remained relatively manageable.
asserted
servicing → mask → it
Through August, the federal government had already spent $1 trillion on interest this fiscal year, compared with about $833 billion on defense and $979 billion on Medicare.
asserted
government → spend → Medicare
Debt servicing has therefore passed defense and Medicare and is now second only to Social Security among major categories of federal spending.
asserted
servicing → pass → spending
The Congressional Budget Office projects that net interest costs will exceed $1 trillion for 2026 and more than double to $2.1 trillion by 2036.
asserted
costs → project → 2036
By then, interest alone would consume 4.6% of GDP.
asserted
interest → consume → GDP
The Fed does not dictate fiscal policy, and Warsh has been careful not to seem to do so.
asserted
Warsh → dictate → policy
Treasury must refinance maturing debt, and when old debt issued at low rates is replaced with new debt at higher rates, the government’s interest bill rises.
asserted
bill → refinance → rates
That changes the arithmetic facing Congress.
asserted
That → change → Congress
Washington does not have a revenue problem but a spending problem.
asserted
Washington → have → problem
Federal revenue this year is expected to be slightly above its historical average as a share of the economy.
asserted
revenue → expect → economy
Spending, however, is running well above its historical average.
asserted
Spending → run → average
In a high-interest-rate world, deficits become more expensive.
asserted
deficits → become → world
More spending means more borrowing, more borrowing means higher interest costs, and higher interest costs mean still more borrowing.
asserted
costs → mean → borrowing
Congress cannot count on cheap debt to hide the cost of overspending any longer.
asserted
Congress → count → overspending
Social Security trustees forecast that the trust fund will exhaust its reserves in 2032.
asserted
fund → forecast → 2032
That is not bankruptcy — payroll taxes would continue coming in — but without legislative changes, incoming revenue would cover only 78% of scheduled Social Security benefits.
asserted
revenue → continue → benefits
Congress will have to address Social Security sooner or later.
asserted
Congress → have → Security
Waiting until 2032 would mean fewer options and sharper changes.
asserted
Waiting → wait → options
Acting earlier would allow reforms to be phased in more gradually and give workers more time to plan.
asserted
reforms → act → time
But for Congress, it underscores a broader fiscal reality: the era in which Washington could borrow trillions of dollars at unusually low cost should be assumed to be over, perhaps never to return.
uncertain
Washington → underscore → cost
The Aporia
