The Federal Reserve has declared the US government’s $36 trillion debt as the biggest risk to financial stability, pushing inflation and geopolitical tensions down the list.
This grim acknowledgment came after the central bank’s survey, conducted by New York Fed staff between August and October, which was included in its latest semi-annual financial stability report.
While the Fed kept a stiff upper lip about the banking sector, calling it “sound and resilient,” the rest of the system doesn’t seem as solid. Hedge funds are maxing out their leverage to record levels, and households—especially those with low credit scores—are falling behind on auto loans and credit cards.
The Fed said delinquency rates in these areas are “above average,” further tightening the noose around the economy.
A $36 trillion elephant in the room
The US government has racked up $36 trillion in gross debt, a figure that’s impossible to ignore. Interest payments on this monster surged by $240 billion in fiscal year 2024 alone, surpassing spending on defense and Medicare.
The budget deficit for the year? A jaw-dropping $1.834 trillion, making it the third-largest in American history. Adding to the chaos, the nonpartisan Congressional Budget Office predicts that the debt-to-GDP ratio will blow past 106% by 2027, breaking records last set in 1946.
And it’s not going to stop there. The CBO warns this ratio will keep climbing for decades if policymakers don’t change course. Expiring tax cuts, budget caps, and a looming fight over the debt ceiling in 2025 are only going to add fuel to the fire.
Maya MacGuineas, president of the Committee for a Responsible Federal Budget, said, “Interest costs are exceeding what we spend on nearly every line item in the budget.” She slammed lawmakers for treating these milestones like business as usual, calling for serious reforms to stop the fiscal bleeding.
Despite the Fed’s warnings, the government seems stuck in a cycle of spending more than it collects. Social Security spending climbed by $107 billion in 2024, while Medicare rose by $25 billion.
These entitlement programs, crucial but expensive, are aging right alongside the US population. Without reform, they’re heading straight for insolvency.
Stablecoins under the Fed’s spotlight
The Fed didn’t stop at traditional finance. Stablecoins also took heat in the report. The market for these digital assets has grown to $170 billion as of November 2024, just shy of its April 2022 peak.
But the Fed has called stablecoins “structurally vulnerable to runs” and criticized the lack of a solid federal regulatory framework to back them up, even though there are high expectations of real regulations coming with president Donald Trump.
But the Fed isn’t exactly Trump’s biggest fan, and with good reason. The president has criticized their decision and taunted them for years, in and out of office.
Meanwhile, bond markets are chaotic. Yields on 10-year Treasury notes shot up sharply in recent months, even as the Fed cut rates by 75 basis points this year. The Treasury term premium (basically what investors demand for holding long-term securities) is near its highest levels since 2010.
Interest rate volatility is also through the roof, thanks to uncertainty over economic growth, inflation, and the endless flood of government debt.
The Fed pointed out that while funding risks have decreased since its last report, they’re still “notable.” The bond market, with its wild swings and soaring yields, isn’t exactly soothing anyone’s nerves. Volatility levels remain above historical norms, making it clear that the economic outlook is anything but stable.
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