MARKET NEWS

BY Matthew Boesler

(Bloomberg) -- US government debt could reach 250% of gross domestic product without putting upward pressure on interest rates, according to a paper presented at the Federal Reserve’s Jackson Hole conference.

“Until fiscal consolidation occurs, there will be a race between the rising asset demand of an older population and the rising debt issuance needed to finance the associated increase in government expenditures,” said its authors — Adrien Auclert of Stanford University, Hannes Malmberg of the University of Minnesota, Matthew Rognlie of Northwestern University and Ludwig Straub of Harvard University.

“Without large adjustments, the supply of debt will eventually outrun demand, forcing interest rates to rise,” they said in the paper. “In our baseline, it is possible to push long-run debt to 250% of GDP without raising interest rates.”

The One Big Beautiful Bill Act passed by a Republican-controlled Congress in July has fueled debate over the importance of rising debt levels and their potential impact on borrowing costs. US government debt held by the public amounted to about 97% of GDP at the end of 2024.

The Congressional Budget Office, in projections issued in January, said it expected the debt-to-GDP ratio to rise to 117% by the end of 2034. After the law was passed, the CBO estimated the legislation would boost that number by an additional 9.5 percentage points.

In the paper, presented by Straub on Saturday at the Fed’s annual gathering of global central bankers in Jackson Hole, Wyoming, the authors took a longer view.

“Our calculations suggest that, in 2100, the US could sustain a debt-to-GDP ratio of 250% at the same interest rates as today. However, achieving this requires a fiscal adjustment of 10% of GDP or more,” they said. “The longer this adjustment is delayed, the more government debt supply outstrips its demand, eventually making government debt unsustainable.”