Federal Debt and the Risk of a Fiscal Crisis

High and rising federal debt, combined with concerns about policymakers’ willingness and ability to manage the government’s finances, increase the risk of a fiscal crisis in which investors demand sharply higher interest rates to hold US Treasury securities. A fiscal crisis would disrupt financial markets, raise borrowing costs and reduce credit access across the economy, and weaken output and employment — which would generate further financial distress. Fiscal crises are extremely difficult to predict, and shifts in investor sentiment can occur very quickly, which increases the value of changing federal tax and spending policies sooner rather than later.