Introduction
Under President Donald Trump’s leadership, the United States’ financial outlook has darkened. The three major credit rating agencies now classify US federal debt one notch below triple A, and Jamie Dimon, CEO of JPMorgan Chase, warns of a crack in the US bond market. With the yield on the 10-year US Treasury bond at a mere 4.41% on June 13, 2025, and the 30-year rate at 4.9%, nominal US debt holders should prepare for substantial real losses.
Key Concerns
The primary risk is not a sovereign default but rather unexpected rises in long-term interest rates due to market expectations of higher inflation. Trump’s fiscal policy is unsustainable, much like during Joe Biden’s presidency, but more so if the administration’s “big and beautiful” budget is approved in its current form.
Current Fiscal Situation
According to the US Government’s Financial Report of January 2025, the proportion of US federal debt held by the public relative to GDP at the end of fiscal year 2024 was around 98%. However, $4.7 trillion of the $28.3 trillion federal debt was held by the Federal Reserve, which means it’s incorrectly categorized as “held by the public” when central bank accounts should be consolidated with federal government accounts.
Under the current policy and based on the report’s assumptions, federal debt held by the public would reach 535% of GDP by 2099. Stabilizing the US debt-to-GDP ratio requires that the federal primary deficit (excluding interest payments) fall an average of 4.3% of GDP over the next 75 years. However, the federal deficit and primary deficit were 6.4% and 3.3% of GDP, respectively, in fiscal year 2024, far exceeding what can be justified by an economy near full employment.
Congressional Ineffectiveness
With such a dysfunctional Congress, no one believes a deficit reduction is achievable. Democrats don’t make permanent spending cuts, and Republicans don’t enact lasting tax increases. The federal government owns approximately 28% of the US land (around 260 million acres), along with other commercial real assets that could generate significant non-tax revenue if managed properly. Yet, no party—not even the misnamed Office of Management and Budget—seems to have considered this option, making it likely that the federal deficit as a percentage of GDP will rise in the coming years.
Potential Outcomes
Without a foreseeable improvement in fiscal policy, there are two possible outcomes. First, the government might default. Although a technical short-term default risk has been small but recurring for some time, the Congress must raise, suspend, extend, revise, or abolish the debt ceiling on time to avoid this scenario. Fortunately, it has avoided this 78 times since 1960, and we hope it continues to do so.
Secondly, the more probable outcome is that the Fed monetizes enough federal debt to prevent a default. Since US federal debt service is conducted in dollars, “printing money” is always an option. However, the Federal Reserve knows that large-scale federal debt monetization would result in significantly higher inflation than the target.
Influencing the Federal Open Market Committee (FOMC)
To get the FOMC to act against its will, President Trump would need to control a majority of its 12 voting members. These include the seven members of the Federal Reserve Board of Governors and five (out of 12) regional Reserve Bank presidents who vote in any FOMC meeting.
Neither the President nor Congress can appoint or remove Reserve Bank presidents. The Board of Governors must approve them, and only the Board can remove them. The President nominates Junta members, but the Senate must confirm them. Current term limits imply that, assuming no dismissals, Trump would only have the opportunity to nominate two new members.
Trump could theoretically attempt to replace most members by exercising the power to dismiss for “just cause”—meaning “inefficiency, negligence in the performance of duty, or misconduct.” However, this seems unlikely. Whether “just cause” criteria have been met would likely be contested in court, and the Senate would need to confirm Trump’s appointments.
Similarly, Congress could revise the Federal Reserve Act to replace the Fed’s monetary policy objectives with a mandate to buy or sell sovereign debt according to the Treasury’s wishes. However, this is also unlikely. The same applies to a scenario where the Treasury sets a rapid depreciation target for the dollar that can only be achieved through large-scale Fed purchases of US public debt, generating high inflation.
Fiscal Dominance
However, fiscal dominance—or “fiscal capture”—is very likely because avoiding a national and global financial crisis will compel the FOMC’s hand. The Fed will do whatever is necessary to prevent a sovereign default, as its financial stability mandate (mentioned 179 times in the 2010 Dodd-Frank Act) will undoubtedly prevail over its monetary policy mandate to maintain maximum employment, stable prices, and moderate long-term interest rates.
The Federal Reserve cannot credibly threaten to refuse monetizing debt and deficits to force the Treasury—or Congress—to fiscal reduction. Consequently, the Fed will have no choice but to conduct bond purchases incompatible with its monetary policy objectives.
Conclusion
With nominal US federal debt interest rates at medium and long terms significantly below levels consistent with realistic inflation expectations, substantial capital losses are likely in both public and private debt instruments. Inflation could rise within three years. As the prospect of fiscal capture looms, investing in Treasury Inflation-Protected Securities (TIPS) and other inflation-indexed public and private debt instruments will become increasingly attractive.
About the Authors
Willem H. Buiter: Former Chief Economist at Citibank and ex-member of the Monetary Policy Committee at the Bank of England, Willem H. Buiter is an independent economic advisor.
Anne C. Sibert: Professor Emerita of Economics at Birkbeck, University of London.
Copyright: Project Syndicate, 1995 – 2025
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