Understanding a Fed Rate Cut – What It Actually Means

The U.S. is over $35.3 trillion in debt. About 75% of this debt is public (owed to investors, other countries, and institutions) and 25% is owed within the government itself. This debt is generated through Treasury bonds, which are like IOUs issued by the U.S. government to raise money.

When the Fed raises interest rates, these Treasury bonds become more attractive to investors because they offer higher returns. However, higher interest rates also mean the U.S. has to pay more in interest on its debt, which can become a massive financial burden.

The Fed’s job is to strike a balance. If the interest costs get too high (like now, with yearly interest payments crossing $1 trillion), the Fed may be forced to cut interest rates to reduce how much the U.S. needs to pay back. This helps manage the overall debt burden.