Donald Trump is interfering in the monetary policy of the US Federal Reserve.Image: keystone
America’s debt is growing – and with it the interest burden. This is exactly where the real risk lies. Can lower key interest rates defuse the crisis?
02/22/2026, 06:1602/22/2026, 06:16
Leon Bensch / t-online
The United States is sitting on a debt mountain of around $38.56 trillion. Within one year alone, gross debt rose by $2.35 trillion. Around $6.43 billion is added every day. These are sums that are enormous even for the largest economy in the world.
US President Donald Trump is therefore calling for lower interest rates. He argues publicly that the “American people” must be exonerated. Lower interest rates mean cheaper loans for businesses and consumers. This can stimulate investment and support consumption.
But interest rate cuts have a second effect: they make it cheaper to finance national debt. The lower the key interest rate, the cheaper the state can borrow new money – at least in theory. Trump expects interest rates to fall significantly with a new boss at the helm of the US Federal Reserve. But can interest rate cuts really ease the enormous mountain of debt – or do they just postpone the problem into the future?
Trump is betting on a new Fed chief
Trump clearly links his interest rate expectations with the personnel at the top of the US Federal Reserve (Fed). Fed Chairman Jerome Powell’s term ends in May. Trump had already announced last month that he would nominate financial expert Kevin Warsh as his successor.
The US President again sharply attacked Fed Chairman Jerome Powell last Friday. “We have a very incompetent Fed chairman who likes high interest rates – for political reasons,” he told the press. However, with new staff, interest rates would fall “very significantly”.
Trump assumes that Jerome Powell has political motives – in fact it may be the other way around.Image: keystone
At the end of January, the Fed left the key interest rate unchanged in the range of 3.50 to 3.75 percent after three cuts in a row. Investors are currently expecting further easing from June at the earliest.
Fed struggles over course – hope for easing
There is currently no consensus within the Fed about the future course. The minutes of the interest rate meeting at the end of January show: The discussion was controversial. Two directors, Christopher Waller and Stephen Miran, voted for another rate cut. However, the majority decided to take a break.
Austan Goolsbee, head of the Chicago Federal Reserve District, also nurtured hopes of easing. The central bank could decide on several interest rate increases this year if inflation continues to move towards the two percent target, he told CNBC. However, you first have to wait for the incoming data.
Inflation means that the prices of goods and services rise. Most recently, they fell noticeably in the USA: in January, consumer prices were 2.4 percent above the previous year’s level, after 2.7 percent in December.
At the same time, the labor market gained momentum again. The Fed is therefore currently not under acute pressure to reduce interest rates quickly. Their legal mandate is to ensure full employment and stable prices.
Debt bubble: Why lower interest rates don’t automatically help
The key question, however, is: Are lower interest rates enough to solve America’s debt problems? Economists doubt this. Debt has risen rapidly in recent years – and it continues to grow. The budget deficit, i.e. the annual gap between income and expenditure, is currently around six percent of gross domestic product (GDP). GDP measures the total economic performance of a country.
According to Brett Ryan, senior U.S. economist at Deutsche Bank, the deficit is expected to reach double digits by the mid-2050s. A look at the past shows that in the 80s and 90s debt levels were lower, but interest rates were higher. Today it is the other way around. Interest rates are moderate, but the mountain of debt is so enormous that even normal interest rates place a heavy burden on the budget.
A reduction in the key interest rate does not automatically make it easier to repay existing debts. New loans could become cheaper. But the total debt remains – and the state still has to pay interest.
There is also a risk: cheaper loans can increase demand. If demand increases more than supply, prices rise again. Inflation would rise – and the Fed might have to raise interest rates again. This would mean that the short-term relief effect would quickly evaporate – and it could even lead to a boomerang effect.
Hardly any room for maneuver for future governments
If interest rates and economic growth remain at a similar level in the coming years, the state will have little scope to reduce debt. High interest payments are tying up ever larger portions of the budget. Money used for interest is not available for investments, infrastructure or social programs. The state falls into a kind of interest rate trap: it always has to take on new debt to service old obligations.
This could make future US governments less able to act in times of crisis. Economic stimulus programs or aid packages are more difficult to finance when the budget is already heavily strained. In the long term, the risk of inflation also increases if states consistently spend more than they earn. Interest rate cuts can provide short-term relief. But without structural reforms and a sustainable budget policy they will not solve the basic problem. (t-online/con)
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