Relentless US Fiscal Spend Risks Undermining Restrictive Monetary Policy, Supersizing Deficits

Dueling IMF publications released this week cast the US as an economic juggernaut in terms of growth, doubling up on its G7 peers, but also as one of the most aggressive accumulators of debt. The country’s deficit is already north of $1 billion just halfway through the fiscal year as outlays for interest payments on US sovereign debt is becoming an increasingly massive expense. Average yields on Treasury bonds throughout the first three months of 2024 have been much higher than the same period in the prior year and a hawkish shift at the Federal Reserve is playing a significant role in ratcheting up long-term rates even further in April.

Fiscal and monetary policy in the US seem to be going in different directions as higher borrowing costs have not restrained government spending, which may be stimulating inflation itself. Further, some have counterintuitively posited that the Fed’s struggle with the so-called “last mile” of its inflation battle is being exacerbated by the Treasury’s flood of large coupon payments to domestic investors. This disconnect between the central bank and federal government may threaten to keep inflation elevated in the face of what is supposed to be restrictive monetary policy.

Related ETFs: ProShares Short 20+ Year Treasury (TBF), ProShares Short 7-10 Year Treasury (TBX), SPDR Gold Shares (GLD), iShares Silver Trust (SLV)

This week, the IMF doled out a rosy forecast for US growth throughout 2024, upgrading its expected GDP growth from 2.5% in its previous World Economic Outlook (WEO) to 2.7% in the latest edition. That marks a more than doubling of any other G7 country’s prospective growth rates, with Canada being the closest at just 1.2%. The issue is, however, that the US’s strong pace of growth is severely trailing the rate at which it is piling up debt. In fact, the IMF’s April 2024 Fiscal Monitor, published just a day after the WEO, notes that the US is projected to record a fiscal deficit worth 6.5% of GDP this year, which will expand to 7.1% next year. The latter figure is more than three times average among other advanced economies and will accompany an expected slowdown in US growth to just 1.9%.

Just six months into fiscal 2024, the US has racked up a nearly $1.1 trillion federal deficit. MRP recently highlighted issues with the US’s pace of debt issuance, particularly the rapid expansion of country’s annual interest payments and the implications for its fiscal health. Interest payments so far in fiscal ’24 were tallied at $440 billion, exceeding the $412 billion in outlays for defense spending. Fitch Ratings calculates last year’s deficit as 8.8% of GDP. Though the IMF expects 2024’s deficit to narrow from that level in percentage terms, the levels of interest needed to finance this year’s excess spending is almost certain to be even higher. Though the annual bill for interest payments the US owes on its debt already surpassed the $1.0 trillion mark in the final quarter of 2023, the US’s Congressional Budget Office (CBO) projects that net interest outlays (which accounts for interest income that the government receives) will total $870 billion this year, surging 32% YoY in the wake of slightly larger increases across each of the two years before that. Depending on the path of monetary policy, it is possible that sum will rise more than currently expected and continues to exceed…