A 1% Fed Rate Hike Adds $95 Billion a Year to US Debt Interest

Every 100 basis points of Federal Reserve rate hikes add roughly $95 billion a year to US interest expense, according to Bank of America analysts Meghan Swiber, Stephen Juneau, Mark Cabana, and Ralph Axel. The figure lands as the White House presses new Fed Chairman Kevin Warsh to lower rates.

Treasury payments to service the $40 trillion national debt surpassed $2 trillion for the 2026 fiscal year, the department recently announced. That is the arithmetic behind the political pressure.

"Clients are concerned about U.S. fiscal deficit risks. We are too," the BofA analysts wrote. "Higher rates become increasingly costly the longer they persist. The near-term deficit outlook has changed little, but the rates backdrop has changed the longer-run fiscal math."

Why is the White House pushing the Fed so hard?

President Donald Trump and his team have lobbied for lower base rates more forcefully than any government in recent memory. They first targeted previous Fed Chairman Jerome Powell through personal insults and a criminal investigation. Now the focus has shifted to the broader Federal Open Market Committee under Warsh.

Trump's team argues rates are too high and hurt consumers' chances of owning a home, since mortgage rates track long-dated yields. But BofA's numbers show the government has its own stake: each percentage point of Fed tightening raises the annual interest bill by an estimated $95 billion.

What does the Congressional Budget Office project?

The CBO modeled two scenarios for debt service payments between 2026 and 2036, according to its recent analysis:

• Rates 150 basis points higher than baseline: deficits grow by $6 trillion, including a $4.9 trillion increase in net interest costs.
• Rates 50 basis points higher: debt projections rise by $1.9 trillion, with an extra $1.6 trillion in net interest costs.

"Even if primary deficits remain largely unchanged, the growing interest burden materially increases the government's financing needs," the BofA analysts wrote.

The mechanism is compounding. As old debt matures and refinances at higher yields, interest expense snowballs even if the underlying deficit stays flat.

When does a debt spiral start?

The BofA team draws a clear line. "Higher yields compound into materially greater interest expense and Treasury financing needs over time, while raising the risk that the effective interest rate on the debt eventually exceeds nominal growth. Debt spiral starts when interest costs exceed nominal growth," they wrote.

That threshold, not the deficit itself, is the number to watch. Once the average interest rate on the debt stock outruns the economy's nominal growth rate, the debt grows faster than the capacity to service it.

Are investors already demanding compensation?

Mark Zandi, chief economist at Moody's, wrote over the weekend that global investors are digesting US spending habits and "appear to be demanding a higher rate to compensate for the mounting risk."

He pointed to the market's verdict. "The 10-year Treasury yield is up about a percentage point this year, among the biggest increases of any major economy, and the countries with the heaviest interest burdens have generally seen the biggest increases," Zandi wrote.

"A vicious cycle threatens to take hold, with higher rates adding to the interest payments and debt load, which in turn pushes rates up even more," he added.

BofA's team shares the concern. They wrote that an unchanged deficit picture is becoming a "bigger financing problem." Their conclusion: "As elevated yields feed through to the debt stock, interest expense compounds, financing needs rise and the fiscal trajectory becomes less sustainable."

The stakes for Warsh's FOMC are now visible in dollars. A single percentage point of rate policy moves the Treasury's annual interest bill by $95 billion — roughly the cost of a major federal agency's discretionary budget — every year the higher rates persist.