Although the US Federal Reserve is widely expected to leave interest rates unchanged at its upcoming October 27-28 meeting, the bigger problem remains.
Inflation is still stubborn, oil is well above $100, and US borrowing costs are becoming increasingly painful as federal debt and interest expenses climb to record levels. Can the US economy survive such a macro landscape?
Can the US Afford Higher Rates?
The dilemma presented by the analysts at the Kobeissi Letter argued that if interest rates average 150 basis points above the Congressional Budget Office’s February baseline projection through 2036, cumulative US deficits could increase by roughly $6 trillion. Citing the CBO’s data, they added that public debt could consequently reach 133% of GDP, while the annual deficit could climb to 8.8% of GDP.
Even a comparatively modest 50-basis-point overshoot could add close to $2 trillion to deficits and push debt to 124% of GDP. The Committee for a Responsible Federal Budget reaches the same conclusion: sustained high borrowing costs would materially worsen an already challenging fiscal trajectory.
The Kobeissi Letter therefore concluded that the US government effectively “needs rate cuts,” but the Fed has little room to deliver them. Inflation is still well above the central bank’s 2% target, while elevated energy prices have added another source of price pressure.
Fed Governor Christopher Waller recently said further hikes would probably be necessary if the economy develops as expected, although they do not have to occur at consecutive meetings. Meanwhile, Fed Chair Kevin Warsh avoided committing to a particular move ahead of the meeting.
A Reuters poll published this week found that nearly all economists expect the Fed to refrain from hiking rates in October before raising them again in December.
What Does it Mean for BTC?
The decision next week is likely to matter less for BTC than the Fed’s next signal. A pause accompanied by softer language on future hikes could relieve some of the pressure created by high Treasury yields and tight financial conditions. This scenario could improve appetite for risk assets and could give BTC a much-needed catalyst after its recent weakness.
In contrast, an unexpectedly hawkish message, or a surprise hike, would probably have the opposite effect. Higher expected rates increase the appeal of yield-bearing assets, tighten liquidity, and typically create a tougher environment for speculative assets such as crypto.
The long-term perspective matters as well. Persistently high rates could pressure in the near term, but the fiscal consequences outlined by the Kobeissi Letter strengthen the argument that the US cannot maintain restrictive monetary conditions indefinitely, which could eventually boost bitcoin.
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