$39 trillion in Treasuries looming—will the Fed dare to hike rates?

There is a view that the Fed will not raise rates because U.S. Treasury debt is as high as $39 trillion; once the Fed hikes, the U.S. government’s finances would “blow up.”

So does that argument make sense? In the author’s view, whether it’s a matter of real-world necessity or institutional design, this position doesn’t hold up.

First, look at real-world necessity. Just do a quick calculation—we’ll find that even if the Fed doesn’t raise rates, the interest cost saved would only be enough for the U.S. government for about a week. The Fed has no need to tolerate a bigger problem—inflation—just to let this little “change” go.

So how is this calculation made? For easier understanding, we assume the Fed makes a one-time rate hike of 100 BP in September 2026 (i.e., 1%), and maintains the interest rate unchanged until December 2027.

Note that the market’s expectation of a 100 BP hike in December 2026 has a probability of only 1.7%, so our assumption is highly hawkish.

So how much additional interest expense would such a hawkish hike create for U.S. Treasuries? This depends on both the existing debt stock and the incremental debt.

First, the dominant part: the U.S. Treasury debt stock is $39 trillion. Of this, $31 trillion directly increases the fiscal burden, while the remaining $8 trillion is intra-governmental debt (in the short term, it mainly involves accounting entries and does not involve actual cash outflows).

Of this $31 trillion debt stock, most bonds are fixed-rate and won’t mature during the assumed rate-hike period. The portions that would be directly affected by the Fed’s rate-hike cycle are:

$700 billion floating-rate notes (FRNs), with rates adjusted once per quarter.

$6.7 trillion in short-term U.S. Treasury Bills (Bills), maturing within one year and requiring rolling issuance.

$4 trillion in medium- and long-term Treasuries maturing.

Only these $11.4 trillion would increase interest expense due to the rate hike; the rest would not pay even an extra cent because of the hike.

Now assume these $11.4 trillion of outstanding bonds mature on the day after the Fed’s 100 BP hike and are replaced by new bonds that reflect the magnitude of the rate increase.

Then the increased interest expense = affected outstanding Treasury debt ($11.4 trillion) × the Fed rate-hike magnitude (1%) × the length of the rate-hike cycle (1.25 years, i.e., Q4 2026 + all of 2027) = $142.5 billion.

Next, consider net new bonds—that is, bonds beyond “borrow new to repay old.” Based on estimates using prior-year data, from September 2026 to December 2027, net new Treasury issuance is expected to be about $2.8 trillion.

With the same rough calculation, assuming net new bonds are issued in sync when the Fed hikes, the increased interest expense = net new bonds ($2.8 trillion) × the Fed rate-hike magnitude (1%) × the length of the rate-hike cycle (1.25 years) = $35 billion.

So, over the rate-hike cycle, the additional interest expense from outstanding debt + new issuance would total $177.5 billion.

In reality, the above calculation process is very rough. If you drill down more carefully, the extra interest expense caused by a 100 BP hike by the Fed is actually far below $180 billion—because:

The Fed typically raises rates gradually rather than all at once.

Rate hikes reduce inflation expectations. Therefore, the yields on medium- and long-term bonds need to be priced with inflation factors, meaning the yields on medium- and long-term bonds don’t move 1:1 with the size of the rate hike.

U.S. Treasury issuance also proceeds gradually. Therefore, whether it’s “borrow new to repay old” debt or net new issuance, neither fully incurs interest outlays for the full 1.25 years.

Taking these factors into account, the estimated additional interest expense from the rate hike is only around $110 billion.

But whether it’s $180 billion or $110 billion, for the U.S. government, which spends about $20 billion per day on average, it’s essentially a question of whether it burns the money in 5.5 days or 9 days—not some “the sky is falling” catastrophe.

And what is the cost of saving this interest? If inflation gets out of control, it will cause far greater losses for the U.S. Would the Fed do something like “picking sesame and dropping watermelons”?

Now, regarding institutional design: institutionally, the Fed has no obligation to solve fiscal problems.

The Fed’s own “constitution”—the “Federal Reserve Act”—Article 2, Paragraph 1, explicitly states that the Fed’s statutory goals include only three items:

maximum employment

stable prices

moderate long-term interest rates.

Does it handle debt management? No.

And the “1951 Accord” between the Treasury and the Fed establishes the principle of “whoever’s child it is, whoever holds it”—meaning debt management belongs to the Treasury, while monetary policy belongs to the Fed.

Therefore, institutionally, the amount of interest expense on U.S. Treasuries is not an issue the Fed needs to consider. Solving it requires the joint efforts of the White House and Congress, far beyond what the Fed can do.

In short, in the author’s view, the Fed will not hold back on a rate hike because of $39 trillion in Treasuries. Market data also show this: FedWatch indicates the probability of a rate hike in September is already above 70%.

Written in closing: regarding the many seemingly plausible but actually unsubstantiated claims circulating about the Fed—at first they may sound reasonable, but on closer inspection they don’t stand up. What other Fed views have you encountered that feel “kind of right but somehow not quite”? Leave a comment in the comment section. For the issue that gets the most comments, the author will write another piece to analyze it.