3rd Quarter 2020
This year, the U.S. federal government’s debt relative to gross domestic product (GDP) is expected to be at the highest level since World War II. This rise is due to the major fiscal response by the Administration and Congress to the COVID pandemic coupled with deficit spending trends in recent years. The Federal Reserve Bank of St. Louis projects this year’s level will be well over 100%. Only a handful of economies such as Greece, Italy and Japan have debt loads that exceed their economies. The last year U.S. debt exceeded GDP was in 1946, when it was at 106% after four years of war.
The novel coronavirus that swept the globe in early 2020 also compelled the Federal Reserve to intervene in an unprecedented fashion. Its aggressive and swift action calmed financial markets, which led to a rebound in many asset prices. The Fed lowered its main interest rate back to near zero in March. It has ramped up its bond buying programs – known as quantitative easing – to pull down long-term rates. Between mid-March and mid-June, the Fed’s portfolio of securities held outright grew from $3.9 trillion to $6.1 trillion. The Fed introduced multiple temporary lending and funding facilities to help institutions with borrowing needs. It has indicated its easy money policy, with low interest rates, will continue for the indefinite future.