By Daniel R. Amerman, CFA

The United States national debt is currently about $20 trillion, and the federal government is paying some of the lowest interest rates in history on that debt. The Federal Reserve has raised interest rates five times now, and is publicly considering another seven increases between 2018 and 2020, for a total increase of 3%.

What will be the impact on the national debt and deficits if the interest payments on the debt jump upwards because of the actions of the Fed

As shown in the graphic above and as will be developed in this analysis, the Federal Reserve increasing interest rates will have a building and eventually explosive impact on the annual deficits that are run by the federal government. The blue area shows what annual deficits would be if the Fed were not raising interest rates, and even in inflation-adjusted terms those would eventually climbing to over $2 trillion a year anyway, primarily as a result of increasing Social Security and Medicare costs.