• A senior Federal Reserve official warns that the current trajectory of US federal debt could eventually constrain economic growth.
  • The national debt, now at $37 trillion, has surpassed the country's GDP, with the debt-to-GDP ratio hitting 119.4%.
  • Rising interest payments, now consuming 10.7% of government spending, are contributing to market volatility and a projected economic slowdown.

Federal Reserve official James Bullard recently underscored a concern gaining traction among economists and policymakers: the sheer scale of US federal debt could, over time, become a significant headwind to economic expansion. This warning comes as the national debt has ballooned to nearly $37 trillion, officially overtaking the country's annual GDP and pushing the debt-to-GDP ratio to approximately 119.4%.

The financial mechanics of this burden are becoming increasingly apparent. The average interest rate on federal debt has more than doubled since 2022, reaching 3.352% as of July. This has catapulted interest payments to 10.7% of all government spending in the last fiscal year, funds that are diverted from public investment or other fiscal programs.

Market participants are already pricing in these risks, contributing to bond market volatility. The Deloitte forecast now projects a US recession beginning in late 2025, with real GDP expected to contract by 1.7% in 2026. Unemployment is predicted to rise to 6% by mid-2026. The 10-year Treasury yield is expected to remain elevated, reflecting a risk premium associated with the nation's persistent high deficits.

Recent legislative action has done little to assuage these concerns. The 2025 Budget Reconciliation Act is projected to add an estimated $4.2 trillion to the federal debt by 2034, which would raise the debt-to-GDP ratio to 126%. Furthermore, the Congressional Budget Office projects the national debt will exceed $52 trillion by the end of fiscal 2035. While a recent bipartisan deal lifted the federal debt limit to $41.1 trillion, people familiar with the matter say this is unlikely to contain future borrowing needs.

The long-term implications are a focal point for debate. Economists warn that this level of debt accumulation threatens to crowd out private investment, limit the Federal Reserve's flexibility to respond to future economic shocks, and ultimately act as a drag on potential growth. Efforts to reach a spokesperson for comment on the Fed's internal modeling were unsuccessful.