When the U.S. government goes deeper into debt, the Federal Reserve actually lowers interest rates to help pay for it.
April 15, 2026
Original Paper
Why the Federal Reserve Cuts Rates when Public Debt Rises
SSRN · 6484759
The Takeaway
Standard theory says that as debt goes up, interest rates should go up too to attract buyers. But this paper finds the opposite: the Fed systematically cuts rates when the debt-to-GDP ratio increases. This suggests the Fed is 'coordinating' with the government to keep the cost of borrowing low, even if it risks other things. For regular people, this means your mortgage rate is being driven by the national debt in the exact opposite way you’d expect. The more the country owes, the 'cheaper' money becomes in the short term.
From the abstract
We document a new fact: conditional on inflation and output, the Federal Reserve lowers the policy rate when the U.S. public debt-to-GDP ratio increases. To explain this pattern, we develop and estimate a New Keynesian model with shocks to households' demand for public debt. These shocks generate a negative comovement between public debt and the natural rate, defined as the real interest rate that would prevail under flexible prices. Assuming that the Federal Reserve adjusts its policy rate in l