[The Federal Reserve calls U.S. debt the biggest threat to economic stability and criticizes stablecoins]
The Federal Reserve sees $36 trillion in government debt as the biggest risk to financial stability, surpassing factors such as inflation and geopolitical tensions. Hedge fund leverage reached record highs, while loan delinquencies continued to rise among households with low credit scores, further adding to economic stress, according to its financial stability report.
The U.S. government debt problem is dire, with interest payments reaching $240 billion in fiscal 2024, exceeding spending on defense and Medicare. That same year the budget deficit hit $1.834 trillion, the third highest in history. The Congressional Budget Office (CBO) warns that debt will exceed 106% of GDP by 2027 and will continue to rise in the coming decades without reforms.
Maya MacGuineas, chairwoman of the Committee for a Responsible Federal Budget, criticized Congress for ignoring the fiscal crisis, stressing that interest payments have overtaken most budget items. Social Security and Medicare spending will increase by $107 billion and $25 billion respectively in 2024, swelling as the population ages and reform is urgent.
The stablecoin market has also become the focus of the Federal Reserve, reaching $170 billion and approaching its peak in 2022. The Federal Reserve criticized stablecoins for lack of supervision and the risk of runs. Although the market has expectations for supervision promoted by the new government, regulatory progress has been slow.
Meanwhile, bond markets are in turmoil, with 10-year Treasury yields surging and term premiums near their highest since 2010. Despite 75 basis points of interest rate cuts this year, uncertainty over debt and interest rate swings still leaves the economic outlook shaky.
The Federal Reserve said that although financing risks have decreased, the volatility and high yields in the bond market indicate that financial stability still faces significant challenges.