Yellen warns higher rates make it harder to manage deficit

Treasury Secretary Janet Yellen has warned that the outlook for higher interest rates over the long haul makes it harder to contain US borrowing needs, heightening the importance of boosting revenue in negotiations with Republican lawmakers.

The White House sees the inflation-adjusted interest payments compared with GDP as stabilizing at about 1.3% over the coming decade, but Yellen does not want it drift above 2%. She previously said the administration’s forecasts generated “historically normal” debt costs.

Goldman Sachs economists do see the ratio exceeding that tolerance zone, projecting net real interest payments reaching 2.3% by 2034. The Federal Reserve aggressively raised rates beginning in 2022 to combat inflation, making it more expensive for the government to service its debt. In its latest annual budget proposal, the White House projected 10-year Treasury yields at 3.7% in the early 2030s, almost a full percentage point higher than the 2.8% seen in its proposal three years before.

Treasury-bill rates, which closely track the Fed’s benchmark rate, have gone up by about half a percentage point in those longer-term projections.

Yellen also mentioned opening up a tax negotiation, alluding to the looming legislative battle over tax cuts passed in 2017 under former President Donald Trump that are due to expire at the end of 2025. While Trump has pledged to extend the cuts, President Joe Biden wants to preserve reductions only for those earning less than $400,000 a year. Some of the revenue from tax cuts that aren’t extended might need to be used for deficit reduction.

Yellen also noted that it will be necessary to pay for provisions that are extended through new revenue, such as implementing the global corporate minimum tax deal. However, she said the US isn’t ready to sign the final version of that agreement.

Biden’s budget includes tax hikes on capital gains and households worth at least $100 million, among other revenue-raising proposals that Republicans oppose.